Supply Chain Finance Misuse ‘Worrying’ but ‘Not Widespread,’ Report Claims
Could a finance approach meant to help small and medium-sized enterprise (SME) suppliers actually do them harm?
In a new report, “Ensuring Payables Finance Remains a Force for Good,” the Global Supply Chain Finance Forum (GSCFF) looks into concerns that some SMEs are being “bullied” into joining payables finance programs. Payables finance is a supply chain finance (SCF) tool that gained in popularity after the Great Recession. It allows sellers in a buyer’s supply chain to gain access to financing through a receivables purchase.
Done right, it means improved payment terms and working capital optimization for buyers. For sellers, it is an alternative source of funding at lower rates than most SMEs could normally access. As the authors of the report explain, “For both, it means more secure and stable supply chains and more sustainable business.”
“When used in an appropriate manner, payables finance programs enable buyers and suppliers to optimize their working capital and strengthen their relationships with each other,” said Christian Hausherr, GSCFF chair and a Deutsche Bank executive. “However, reports relating to the misuse of payables finance programs, notably around suppliers being forced into accepting unfavorable terms, are extremely worrying. As such, the GSCFF has taken the initiative to address these concerns head-on, to promote understanding of the technique and its use.”
However, GSCFF said it found reports of such abuse “somewhat sensationalist” and insisted that this “is not a widespread practice and it is most certainly not ‘best practice.'” It made several recommendations regarding payables finance:
- Suppliers should feel “absolutely no obligation to participate” in these programs.
- Liabilities arising from SCF programs “do not create additional financial risk above and beyond those that arise from trade between a buyer and a seller.” The report urges the use of “strong credit analysis” to identify potential red flags before they sign on the dotted line.
- The use of such finance approaches have become more common during the pandemic, “yet this does not create increased risk within the system as it would be counter-productive and inappropriate for banks to swiftly withdraw credit lines.”