The recent announcement of a supply chain finance initiative for small businesses has been met with mixed reviews. Will it in fact benefit small businesses? There are concerns that it could create and even bigger culture of late payment among large companies, the very problem the scheme is looking to address. The shadow business secretary, Chuka Umunna, has joined finance experts in warning of the potential draw backs of the scheme.
The government claims that the scheme could open up £20bn of cheaper financing for small businesses, but critics such as Mr Umunna are warning that this could create the impression that late or slow payment is acceptable and something the government is willing to accept. He added that, although there were no objections to the idea of such a scheme based on factoring procedures, it would in fact be redundant if businesses were motivated to pay on time.
He says; ‘I think late payment by large companies to SME suppliers is a complete outrage and a national scandal. By not paying on time, large firms are forcing small companies to bankroll them – it’s indefensible and it has got to end.’
The supply chain finance works in a sense like reverse factoring; big businesses notify a bank as soon as their supplier’s invoice has been approved. The bank, armed with the assurance that the bill will be paid, will then extend a full, immediate advance of the funds to the supplier at a low interest rate. David Cameron has announced that 36 firms, including Tesco and BT, are considering joining the scheme.
Though it has been branded as ‘win-win’, will this actually be the case? The large companies get to hold onto their money, the banks are allowed to charge interest, and small businesses have to pay this interest on funds that should be paid in full, directly by their customer. So, will it ease late payment or just create even more issues? It looks like SMEs might once again be getting the rough end of the deal.