The madness of long payment terms…

…and the shortcomings of supply chain finance.

…and the shortcomings of supply chain finance.

The Carillon bankruptcy, and the painful losses it has wrought on tens of thousands of suppliers, has brought into stark relief both the madness of long payment terms and the shortcomings of supply chain finance (SCF), particularly when used to mask a corporate’s extension of those terms.

A recent article in PYMTS covering a Fitch report and an earlier Moody’s report, have prompted some strong denials from the trade finance industry. Some have gone as far as to say the idea of SCF as a form of corporate debt is “madness”. That is unfortunate. The trade finance industry should welcome scrutiny.

There is a lot of obfuscation and misunderstanding around SCF and, as explained below, SCF has often been used to mask the extension of payment terms. This is not good for the industry. If it continues to be in denial about the genuine risks which long payment terms cause, and the unintended consequences of SCF, it will suffer further reputational damage and regulators will have no choice but to step in.

At Previse, we strongly support an alternative approach. We should recognise the limitations and risks of SCF and commit to address them so that the benefits of faster invoice payment can be more widely available. We’re pleased to see that respected practitioners, such as Orbian’s Tom Dunn in this recent TXF article, take a similar view.

In this blog I address 4 inter-related issues:

  1. The fallacy that long payment terms are good for large corporates
  2. The most important misunderstanding about SCF is that its purpose is to help suppliers. SCF does not benefit most suppliers; penetration rates average less than 1% of suppliers (ie only the very largest suppliers, who don’t need early payment). SCF is primarily a tool to help large corporates optimise their working capital
  3. Damaging term extension and SCF being used as a smoke screen, with the unintended consequences of severely hurting smaller suppliers
  4. Whether long payment terms should be considered debt on the balance sheet of a company, irrespective of whether SCF is involved

We designed Previse specifically to address these problems – to give every single supplier, no matter how small, the option of being paid instantly on receipt of invoice. We work with existing SCF providers, and our tech allows them to fund SCF programmes earlier (pre-approval) and deeper (to the smaller suppliers). We get suppliers paid, instantly.

1. The fallacy of long payment terms

All business to business (B2B) commerce with payment terms (paying later for goods or services) is using suppliers as a line of credit. In other words, the buyer is borrowing from the supplier. This means that there is a financing transaction bundled with the purchase transaction, with the supplier providing capital in the transaction.

This is not economically rational for a large, credit worthy buyer who trades with suppliers with a lower credit rating. Viewed narrowly, it is often argued that the corporate is getting a free loan which must be a good thing for the buyer. The actual result of these “free loans” from small suppliers to large buyers is that the buyers end up paying for the suppliers’ finance cost (which is high) through the purchase price of the goods and services. It causes stress to suppliers and, when it goes wrong, can have a severe reputational cost for buyers. When viewed holistically, these costs far outweigh the narrowly viewed benefit of a “free loan”, as explained in further detail by my co-founder David Brown in his blog here. In short – long payment terms are madness for large, credit worthy corporates and a colossal inefficiency for global B2B commerce.

The fact is, it would be far better for a large corporate to pay fast, not slow.

Unfortunately, this goes against the received wisdom. The equity analysts do not consider the impact of extended payment terms holistically. Companies are rewarded for extending payment terms with stock price increases, despite the fact that it is not economically rational for a large corporate with a cost of capital of 2% to borrow from a small supplier with a cost of capital of 22%.

2. SCF typically only works for “The 1%” of suppliers

The PYMNTS article actually fails to address the most important misunderstanding about SCF, that it actually does not benefit most suppliers.  In most cases, SCF is only offered or appropriate for the very largest suppliers, who typically don’t need it. This calls into question the very basis often trumpeted as SCF’s prime benefit – that it helps suppliers.

The promise of SCF is that it allows suppliers to get paid earlier than the payment terms, on approval of an invoice, at a financing rate reflecting the credit rating of the buyer. That’s compelling, and it makes sense where the buyer’s credit rating is better than the supplier’s.

I have reviewed over 100 SCF programmes, and the average penetration for bank-led programmes is under 1% by number of suppliers. Those large suppliers often have a better credit rating than the buyer.  In other words, for a large corporate buyer with 50,000 suppliers, typically less than 500 of its very largest suppliers are in the SCF programme and 49,500 are left out. For non-bank providers the penetration is closer to 10%. The best in class, due to efficient onboarding, seems to be 15%.

In reality, SCF is primarily a tool to help large corporates optimise their working capital – it is not a product designed to help suppliers. There is nothing wrong with that at all, but let’s call it what it is.

3. Damaging term extension and SCF as a smoke screen

When a corporate has a fragile balance sheet, one of the first things it does, often urged on by a phalanx of advisors, banks and consultants, is to extend its payments terms.

The practice has become more widespread over the past decade. It has left significant economic destruction in its wake, as well as  heart-ache for the owners and employees of many small suppliers. It has been common practice to extend terms and to use SCF to mitigate the impact.

Here’s how that works: the corporate extends its terms (in Carillion’s case from 30 days to 120 days) but also offers SCF. It can then claim that suppliers can continue to receive payment on 30 days, with the SCF provider financing the gap of the additional 90 days before the buyer pays. In reality, as I have explained, SCF is only offered or appropriate for the very largest suppliers, leaving the vast majority of suppliers to suffer the extended terms and a long period of credit exposure to the buyer, as was devastatingly demonstrated by Carillion.

So, 1% of suppliers were unaffected by the term extension, but 99% were left with 120 day payment terms – an eternity for a small supplier.

4. Are long payment terms debt?

Companies tend to take the view that outstanding payments to their suppliers (trade creditors), almost regardless of the time period, are part of the “normal course of business” as opposed to loans on the balance sheet. Auditors often confirm this view, as do market analysts who do not consider trade creditors when it comes to looking at a corporate’s debt-to-equity ratios. As a result, creating working capital in the form of longer payment terms to suppliers is frequently the first borrowing option of any large buyer.

If a buyer extends its payments terms, then at some point it must be considered “not in the ordinary course of business”  and so not a trade payable but rather debt. At what point is that? 90 days, 120 days, 730 days? There are many highly skilled accountants and auditors to answer this question, but the question has to be answered.

Carillion had £150mn of debt recognised as such on its balance sheet, and another £500mn lurking as SCF, reported as “other creditors”. and omitted from the borrowings disclosure. This £500mn was owed to its syndicate of three SCF banks, and yet not shown as debt on the balance sheet.

Not only can SCF obscure the buyer’s real position with its suppliers, it can also give investors and analysts an unhelpful impression of the company’s balance sheet.


There are good historical reasons for payment terms, including that a buyer needs time to inspect a delivery and to ensure that payment should be made. Since the financial crisis, there has been a big push from large corporates to extend their payment terms in order to bolster their balance sheets, meaning that suppliers often have to wait and chase for months to get paid, as this cost of working capital is passed down the supply chain to those with the least negotiating power (and, perversely, the highest cost of capital).

With today’s technology, suppliers waiting and chasing for invoices to be paid can now be a thing of the past, without either the buyer or the supplier having to change their processes. Suppliers can be paid as soon as an invoice is delivered, and it can be funded and underwritten by a third party so that there is no impact to the balance sheet and no change to process for the buyer.

We built Previse to overcome the problems of payment terms and to ensure that every supplier in the world can be paid instantly at the fairest price. The data generated in businesses today can be used to build highly accurate prediction models of payment behaviour which enables a funder to provide funding even before an invoice has been approved, and to underwrite the risk that the invoice may not eventually be settled by the buyer. This can be done in a scalable and accessible way, allowing every supplier, in particular the smaller suppliers,  to enjoy the benefit of being paid instantly, for a low fee.

Every supplier in the world, no matter how small, can have the option of instant payment of its invoices.

It is time to get suppliers paid, instantly.

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