Breaking the vicious cycle of late payment (parts III & IV)

By Manos Schizas, senior SME policy adviser, ACCA

This post is the second of two posts on the problem of late payment. The first post can be read here.

Part III: A realistic solution

What ACCA suggested to BIS and the colleagues at our meeting is that if Government can’t count on more coercive measures to abolish late payment and abusive terms of credit, then it should also look at ways of making them irrelevant.

In theory, invoice discounting can help – if a finance provider can buy your invoice and chase it up for a reasonable discount then it doesn’t matter when your customer ends up paying. The problem of course is that paying a third party to take on your credit risk can be a pretty expensive business. They’re taking on a risk that depends on your customers, but their contract is with you, not them, and they don’t get to choose your customers for you. This is part of the reason why banks, for one, are really not keen to take on their customers’ credit risk (evidence here and here) and can usually only offer invoice discounting facilities with substantial restrictions (more details here).  As a result, only about 2% of the business population (some 90,000 businesses) use such facilities, and accountants around the UK often report significant complaints from clients.

But what if the risk to the finance provider could be reduced substantially? Suppose your customer were a major corporate, or the government itself. And suppose there were a way for the finance provider to know whether the customer has accepted your invoice and even how it is progressing through their payment systems. Even better, suppose your big, creditworthy customer (who would normally have an incentive to use their advantage over you) could borrow against their own superior credit rating and use their greater bargaining power with the finance provider in order to pay you ahead of time. They should be able to obtain a discount that reflects their borrowing costs rather than yours, then pay the finance provider on their preferred terms.

That makes things a lot easier; it gives powerful customers a means of obtaining cheap credit without narrowing their supplier base over time; and of course small suppliers can plan their cashflow and expect fewer surprises (which their banks will also appreciate). The arrangement, known as supply chain finance, is far from exotic; it may not be widely used but it’s there, and considering how many SMEs get finance from their customers through discounts for early payment (9% in this survey) the concept at least should not be alien to many businesses.

The problem is that supply chain finance relies on complete invoice transparency – the supplier, the customer and the finance provider need to know at all times how far the invoice is along the payments process and be assured that it can’t be lost or tampered with. This is where electronic invoicing comes in. E-invoicing and supply chain finance are a natural match. As it happens, BIS has just come out in support of further use of e-invoicing as part of the solution to the late payment problem, and recognised the UK E-Invoicing Advocacy Group (UKeAG) as the UK’s national multi-stakeholder forum on e-invoicing and thus a partner in promoting e-invoice adoption. Excellent timing.

So our suggestion to BIS and the Cabinet Office has been simple. Offer those businesses you can influence (Government suppliers and major listed firms) a deal: either commit publicly to paying your suppliers in x days of receipt, or give them the option of signing up to an e-invoicing system and provide them with a supply chain financing facility. Of course, government can do the same to its own suppliers. Visibility is key to such an initiative; the market needs to know the facilities are in place and lower-tier suppliers need to know that prime contractors are getting paid in this manner so they can demand a better deal for themselves. Would they get it? It’s hard to know but at least their bargaining power would be greatly enhanced.

The story doesn’t end here. Perhaps government can’t coerce major customers into supply chain finance arrangements, but their suppliers still have many ways out. Along with traditional finance providers, who are not without products of their own in this area, ACCA has, for the past year, been following the progress of a number of innovative platforms allowing businesses to auction their invoices online to sophisticated investors. Organisations such as MarketInvoice or Platform Black are growing exponentially and others are sure to follow. Already they are organised in the Next Generation Finance Consortium; the Government has a credible interlocutor. Major customers can use such firms if they don’t wish to commit themselves to a relationship with other intermediaries, at least for those suppliers who would agree to have their invoices auctioned. If this arrangement could be managed by the customer, suppliers would face neither the admin cost nor the stigma (real or perceived) of factoring their invoices.

[Note: very bad pun to follow]

Part IV: Vend it like Viking

Will late payment ever be eradicated? Of course it won’t. But on the other hand we shouldn’t accept that current levels are somehow inevitable. Across Europe, payment times are much better in many countries than they are in the UK – all of the Nordic countries, for instance, enjoy much lower levels of late payment. Sure, one can put this down to ‘culture’, whatever that means, but other, harder, factors are at play too. It’s no coincidence, for instance, that these countries tend to be the best-known early adopters of e-invoicing. What other practical tools they have brought to bear I don’t know in detail, but the know-how is out there, and since current financing conditions for SMEs seem very persistent, the UK needs to start catching up fast.