In light of ongoing scrutiny over the misuse of supply chain financing to the detriment of small businesses, the director of Fifo Capital has called for a rethink, predicting a rise to prominence of reverse factoring for SMEs.
On 30 September, the federal Labor Party announced that the ACCC had launched an investigation into big businesses’ utilisation of reverse factoring (also known as supply chain financing) to impose extended payment times on small-business suppliers, who rely on prompt payment of invoices to manage their cash flow.
Further, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell this week announced the launch of a review into supply chain financing, based on the prevalence of the same issue.
Ms Carnell labelled the practice of big companies abusing the system to the detriment of small-business suppliers as “totally unacceptable”.
In response to heightened scrutiny of reverse factoring, director of supply chain financing specialist Fifo Capital, Wayne Morris, has called for a rethink on the subject matter.
Mr Morris estimates that supply chain finance will be used to underwrite “the majority” of small to medium-sized enterprises over the next five years.
Fifo Capital’s model, along with other supply chain finance lenders, allows businesses to extend their credit terms by up to 90 days.
If a supplier should wish to recoup the cost of the invoice prior to 90 days time, fees are often charged.
It is this practice in particular that sees small businesses struggle to manage cash flow, according to the ACCC and ASBFEO.
A statement from the Minister for Small and Family Business said: “It is not acceptable for large business to use small suppliers to optimise their cash flow.”
However, Mr Morris said he believes supply chain finance is a modern finance option that benefits businesses, big and small.
“Supply chain finance is a product of today, releasing liquidity for millions of small companies and underwriting risk in a new and innovative way, it’s time for a rethink,” he said.
“Financial products are developed because supply chains are becoming increasingly complex.
“Businesses aren’t confined to the factory gates anymore, rather they’re dependent on a network of suppliers and partners to come together in a tight, working collaboration."
He added: “Put simply, cash is the glue that holds supply chains together and supply chain finance is best used to help avoid small businesses waiting around to be paid by big business."
Mr Morris said he believes supply chain finance is used best when it’s able to work through multiple levels of the supply chain, so the burden and benefit of liquidity can be shared throughout.
“Get it right and what looked like a fractious circle based on payment term dispute now looks more like a virtuous circle.
“The subcontractor has certainty of payment without risk, and the lead contractor will attract the best trades because of it,” he said.
The ASBFEO’s review will examine how supply chain finance is being used within industries, and the prevalence of the product being used to the detriment of small-business suppliers.
An initial report on the reviews findings is expected to be completed by the Ombudsman by March 2020, with a full report to be released in April 2020.