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Supply Chain Finance for small businesses

In October 2012, the Prime Minister announced that almost 40 of the UK's largest companies have agreed to provide Supply Chain Finance (SCF) to their small business suppliers.

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It is no secret that large companies in the UK generally have strong credit ratings and good access to finance.

This is at odds with the small and medium-sized businesses supplying them who often struggle to get bank funding and have to cope with ever-increasing payment terms from larger suppliers.

Under the Government's new SCF scheme, large firms receiving an invoice from their small suppliers will be able to authorise their bank to offer an advance payment at relatively low interest rates in order to provide small businesses with working capital.

After meeting with the Prime Minister, the following companies have agreed, in principle, to offer Supply Chain Finance:

AB Foods; ASDA; Atos; Babcock International; BAE Systems; Balfour Beatty; Boeing; BP; British Airways; BT; Capgemini; Carillion; Centrica; Dell; Diageo; EDF Energy; Finmeccanica; General Dynamics UK; GKN; GSK; Home Retail Group; HP; IBM; J Sainsbury; Jaguar Land Rover; Kingfisher; Lockheed Martin UK; Marks & Spencer; MBDA; O2; Serco; Siemens; Statoil; Tata Steel in Europe; Tesco; Thales.

Rolls Royce and Vodafone already offer this facility to their suppliers.

The Government estimates that the agreement will help tens of thousands of businesses by delivering up to £20 billion of affordable finance.

Supply chain finance explained

With Supply Chain Finance, a bank is notified by a large company that an invoice has been approved for payment; the bank is then able to offer a 100% immediate advance to the supplier at lower interest rates, confident that the invoice will be paid by the large company.

The Prime Minister also confirmed that the Government will look to offer this to its own suppliers, starting with the first UK Government Supply Chain Finance scheme for community pharmacies in England.

The benefits of Supply Chain Finance include:

  • Providing cheap funding to suppliers based on the credit quality of their customers
  • Allowing suppliers to receive 100% of the invoice value, less a small finance fee, rather than the 70-90% generally offered through traditional finance products such as overdrafts, invoice discounting or factoring
  • Reducing the overall cost of finance and improving supply chain efficiency.

While the Forum supports the scheme, we believe that it is vital for those big businesses taking part to make sure the money goes all the way to the bottom of the supply chain to the smallest businesses that would most benefit from the better credit rating of larger organisations.

We're also warning the Government that it to be careful the scheme does not create a culture of late payment among large firms, where they no longer feel compelled to pay promptly and – in the worst case scenario – make it a pre-requisite for suppliers who use the system to accept longer payment times.

However, we're happy to see that this has been countered in some way by Business Minister Michael Fallon who has warned all FTSE 100 and 250 businesses that they will be publicly named and shamed in the new year if they fail to sign up to the Prompt Payment Code.

Other Government backed schemes to deliver credit to small and medium-sized businesses have included the the Funding for Lending scheme to encourage, Enterprise Finance Guarantee and a start-up loan programme to help young people start their own businesses.

If you have any experience of using these government schemes, or trying to access supply chain finance from a large supplier, we want to hear from you. Email your story to publicaffairs@fpb.org – we can guarantee to keep your business anonymous if you wish.

To find out how we can help your business access alternative sources of finance, call us now on 0845 130 1722.

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