Long post incoming interesting read13 Mar 2021 15:26
Michael Vrontamitis Trade Finance and Banking Leaders comments
Supply Chain Finance and particularly Payables Finance is back in the spotlight after the news flow on Greensill. Is this the death knell for the product or is it a case of mistaken identity? The reality is that the product is a critical solution in enabling highly automated and lower cost finance for smaller businesses. The discussions around whether Payables Finance should be treated as bank debt or what disclosures are made in a company’s financials is a valid one, but not as simple as some commentators portray. For now, the onus is on Auditors to take a deeper look when making classification decisions and if it walks, talks and smells like bank debt then it probably is – and if not, then it’s not. Lessons will be learned, and the market will evolve for the better.
Like any victim of a crime, Supply Chain Finance (SCF) practitioners are angry. The crime is that their darling product, Payables Finance[1] or Reverse Factoring in the suite of SCF solutions, is being identified as a key suspect, when they believe Payables Finance is in fact the victim and the real suspects are just deflecting blame.
The recent press on Greensill and their well-documented problems, along with the hangover from the Carillion and Abengoa bankruptcies, has led to many reputable publications laying the blame at the feet of Payables Finance (along with the other ‘red flags’ of a company in trouble that seem to be only apparent after the fact).
The Parliamentary Report[2] commissioned post-Carillion’s bankruptcy summarized:
Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.
In terms of financing, the report highlights that Carillion forced suppliers to accept 120 days payment terms and offered early discount. When Carillion went bust, the SMEs who had discounted their receivables had been paid and the supply chain finance providers ended up holding the credit loss.
It will no doubt be interesting to read the inevitable Parliamentary Report on Greensill if the worst happens and there is a significant impact on the economy and jobs (though, for the sake of the many companies Greensill is financing, the author sincerely hopes a solution is found).
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