Isn’t supply chain finance just a sticking plaster?

British Constructional Steelwork Association director general, Sarah McCann-Bartlett, replies to a recent Infrastructure Intelligence opinion article on the subject of supply chain finance.

Tony Duggan’s analysis of the problem of late payments for SMEs (“Late payments damaging SME suppliers in the construction sector”, Infrastructure Intelligence 19 July) is spot on. However, his proposed remedy is just a sticking plaster that simply masks some main contractors’ inability to pay on time, and comes with a whole new set of risks.

Mr Duggan, chief executive and co-founder of Crossflow Payments, seems to be suggesting a form of supply chain finance. This is basically ‘pay to be paid’ - reverse factoring, as it’s sometimes called - you can have your money in, say, 120 days without finance or in 30 days if you pay a small finance charge.

The facility is the payer’s. Supporters say that this means the whole supply chain can take advantage of the – usually- bigger payer’s ability to negotiate lower finance rates. They say that SME specialist contractors get their payments more quickly, without all the hassle of chasing. The payer is able to hold onto its money for longer and its administrative load is considerably lighter - one payment a month.

Is this really a win/win or is it high risk to rely on a complicated, costly and largely unregulated product?

Some SMEs like the idea and find it helpful. But it is not a panacea and as always, the devil is in the detail.  

All schemes are different and some are more complicated than others.  Key issues include:

  • Some contractors require their supply chain to be part of such a scheme, whether they want to be or not.
  • Others might push specialist contractors to 120 days payment if they don’t sign up to a scheme.
  • The finance is off-balance sheet so the extent of the factoring is not transparent.
  • It allows payers to look like they are paying within the legally mandated 30 days for public contracts.
  • And if the scheme ends, will payers go back to normal payment periods or will SMEs be left with payment at 120 days?

The finance cost will be added to the overall cost of doing business, increasing costs for clients and adding to the overall cost to construction for UK plc – something government is at pains to reduce, not increase.

These schemes can also mask the fact that a payer is unable to generate enough positive cash flow from its operations to pay its supply chain on time.  

A less risky alternative is project bank accounts which are low cost and simple in comparison.  Project bank accounts ensure that all contractors are paid at the right time and benefit SMEs by providing protection without any cost to them. Better to use them as the Westminster government and all the devolved governments, to varying degrees, do.

Sarah McCann-Bartlett is the director general of the British Constructional Steelwork Association.