Suppliers have warned a new Bank of England supply chain finance initiative could slash their margins and encourage companies to increase payment times.
The Bank is set to launch a supply chain finance facility as part of its £125bn effort to boost the economy. Supply chain finance is designed to make it easier for large investment-grade companies to extend their payment time by allowing suppliers to borrow money against outstanding invoices. Sainsbury's is an early adopter, having launched an early payment scheme backed by RBS, but did not extend its payment times.
The Procurement Intelligence Unit suggests that by using supply chain finance and extending payment times, companies could cut their working capital by up to 7.5%. But the savings come at a cost to suppliers, who face charges of 2% to 3% of an invoice’s face value if they take advantage of the credit. The customer then pays the invoice directly to the lending bank.
Big companies cut their working capital through supply chain finance by extending payment times. Suppliers who would struggle to survive with the longer payment time can choose to be paid early, reducing the risk of disrupting supply chains as payment times extend.
“Our analysis has found that those organisations embracing SCF have shored up their supply chains, ensuring increased availability of working capital for them and their suppliers,” said Procurement Intelligence Unit CEO Mark Perera. “Even if only a proportion of the UK’s largest organisations implemented it, billions of pounds of working capital could be freed up.”
But suppliers warned that if their customers extended payment times and offered SCF, it could be hugely damaging to their businesses.
“Having to pay a charge just to get paid on time is frankly ridiculous,” said one. “Two per cent or 3% may not sound much, but that would be a massive margin hit. It would make some of our contracts barely worthwhile.”
The Bank is set to launch a supply chain finance facility as part of its £125bn effort to boost the economy. Supply chain finance is designed to make it easier for large investment-grade companies to extend their payment time by allowing suppliers to borrow money against outstanding invoices. Sainsbury's is an early adopter, having launched an early payment scheme backed by RBS, but did not extend its payment times.
The Procurement Intelligence Unit suggests that by using supply chain finance and extending payment times, companies could cut their working capital by up to 7.5%. But the savings come at a cost to suppliers, who face charges of 2% to 3% of an invoice’s face value if they take advantage of the credit. The customer then pays the invoice directly to the lending bank.
Big companies cut their working capital through supply chain finance by extending payment times. Suppliers who would struggle to survive with the longer payment time can choose to be paid early, reducing the risk of disrupting supply chains as payment times extend.
“Our analysis has found that those organisations embracing SCF have shored up their supply chains, ensuring increased availability of working capital for them and their suppliers,” said Procurement Intelligence Unit CEO Mark Perera. “Even if only a proportion of the UK’s largest organisations implemented it, billions of pounds of working capital could be freed up.”
But suppliers warned that if their customers extended payment times and offered SCF, it could be hugely damaging to their businesses.
“Having to pay a charge just to get paid on time is frankly ridiculous,” said one. “Two per cent or 3% may not sound much, but that would be a massive margin hit. It would make some of our contracts barely worthwhile.”
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