With supply chain financing at the front and centre of a countrywide debate, a financing expert has warned that more market education is necessary to make sure the debt-free funding model is used correctly and to the benefit of the SME sector.
Following the small business ombudsman’s series of warnings to big businesses, Fifo Capital supply chain finance specialist Wayne Morris has urged for more market education to ensure the funding model is used correctly and not as another way big buyers can pressure suppliers.
The Melbourne headquartered operation — which has underwritten business in excess of $1 billion in recent years — predicts supply chain finance (SCF) to be the future funding model of choice for small to medium enterprises if used as it’s intended.
Mr Morris believes the SCF product needs to be differentiated from the recent behaviour of larger businesses.
“The interim position paper released by the ASBFEO last Friday is putting the spotlight on how this funding model is best used — and that’s to support small business release liquidity and underwrite risk.”
Drawing on his extensive UK expertise, Mr Morris believes some of the issues surrounding this new funding product in the Australian market stems from lack of understanding.
“There’s a role our industry must take on to educate CFOs, accountants and business advisers that the success of SCF relies on suppliers and partners working in collaboration — and as a result we’re developing a CPD program to launch over the next six months,” Mr Morris said.
“Put simply, cash is the glue that holds supply chains together, and SCF works best when one of two things are in play: big businesses honour their corporate responsibility to support their suppliers and provide debt-free funding, or when the supplier is in control of the timing and chooses which invoices are being paid to fund growth and invest as they require. But never for the customer to use to extend terms at the supplier’s expense as recently reported.
“Getting this right means you’re really using the model as its intended, as a virtuous supply chain circle, not further reasons for payment dispute.”
Legislation on the cards
Earlier this week, the small business ombudsman said that she may have no other choice but to recommend federal legislation requiring all businesses to be paid in 30 days in order to fix payment times.
Admitting that supply chain finance is a legitimate and effective tool that can be used to free up cash flow for small and family businesses, Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell said that too many big businesses have extended payment times and then offered supply chain finance.
She opined that this practice is “totally unacceptable”.
In order to fix the issue, Ms Carnell suggested that the Payment Times Reporting Framework replace the Supplier Payment Code, with that framework being administered and enforced by an appropriately funded, empowered and proactive entity.
The ASBFEO is currently seeking specific and general comments on its position paper outlining the key preliminary findings of the Supply Chain Financing Review by 28 February.
Maja Garaca Djurdjevic is the editor of My Business.
Maja has an extensive career as a journalist across finance, business and market intelligence. Prior to joining Momentum Media, Maja spent several years unravelling social, political and economic intricacies in Eastern Europe.