Unintended consequences for supply chain finance programs

Brittany ColesMarch 10, 2020, 1:04 amMarch 10, 2020

Supply chain finance initiatives may have unintended consequences from the efforts to shut unfair supply chain finance programs.

Some of Australia’s largest companies are moving away from their early payment supply chain finance programs due to pressure from the office of the Australian Small Business and Family Enterprise Ombudsman.

Wayne Smith, Scottish Pacific senior executive said the Ombudsman was rightly trying to ensure SMEs are not put at a disadvantage by big business.

“We applaud the efforts of ASBFEO to protect the interests of small business Supply chain finance owners, and to encourage large corporations to end programs that stretch out payment times for SMEs in order for them to secure early payment discounts,” he said.

“The catch-22 in shutting down these programs is that, while in the long-term this may help the SME sector, in the short term essentially SMEs have had a funding option taken away from them.”

Scottish Pacific is Australasia’s largest specialist working capital provider that lends to small, medium and large businesses from start-ups to SMEs with revenues of more than $1 billion.

Wayne said cash flow is already a huge issue for Australia’s SME sector, so small businesses coming off these early payment schemes will need to find new ways to ensure they have adequate cash flow.

SME Growth Index research shows twice as many SMEs are reporting significantly worse cash flow as the previous year, and more than a quarter of small businesses say their cash flow problems make it difficult to meet their tax payments on time.

He said debtor finance is one funding option that can help those businesses coming off cancelled early payment programs as the facility is ‘always on’ as opposed to supply chain finance and early payment programs which may only provide funding during ‘discount windows’.

He said early payment programs should operate to help SMEs, not to squeeze them into taking a pay cut in exchange for prompt payment.

“These programs should be designed to be a ‘win-win’ for buyers and suppliers, not as a means to push out supplier payment terms from existing supplier arrangements,” Wayne said.

“The danger is when larger corporations are able to use these programs to their benefit to extend payment terms, with a negative impact on the little guy”.

Wayne said SMEs and its advisors should update themselves on the full range of funding options available to small businesses.