Trade Finance Finds Glare In Late Payments Spotlight

Finance has many levers to pull when it comes to pulling back on payments  England finds itself in the unpaid invoice-related headlines again.  And India makes some news of its own as smaller firms say they are being squeezed in bankruptcy by larger companies that choose not to honor payment terms.

The movement to speed commerce comes alongside the movement to open up trade finance, the funding of international trade through various agreements between sellers and buyers. But when late payments become part of the tapestry, financing options and inventiveness suffer. The impact of late payments has been strong enough to merit a warning from Fitch Ratings.

As reported last week, Fitch said a loophole tied to corporate accounting exists, one which opens the door to longer payment terms. The loophole is described in the “What Investors Want To Know: Supply Chain Finance” report, and details third-party supply chain financing. That financing need not be classified as debt, which in turn keeps that financing from showing up as debt on the balance sheet.

That financing option allows firms to tap into selling unpaid invoices to other corporate buyers. Those buyers can take longer to pay invoices, while classifying the financing as “other” payables, which may help their credit profiles. The practice is known as reverse factoring and, as Fitch wrote, “we believe the magnitude of this unreported debt-like financing could be considerable in individual cases and may have negative credit implications.”

One notable user of such financing: Carillion, the U.K. contractor that went bust earlier in the year.

As reported, a survey of 337 U.S. and Europe, Middle East and Africa (EMEA) companies found that median payables days increased 14 days in 2014. That is the highest level since 2017. The total value of payables increased by $327 billion, Fitch Ratings said.

The Fitch findings were underscored at the end of the month when PrimeRevenue, a trade finance platform, said that 90 percent of firms onboarded to the company’s platform embraced payment term extensions, which was up from 78 percent three years ago.

The U.K. (And Construction) Yet Again

The U.K., yet again? Yes. Among the latest statistics to bedevil the construction industry, trade body Build UK published stats that show the performance of its member companies when it comes to timely payments. The results show that not one of the top two dozen firms pays supply chain invoices within a 30-day period. The quickest payer, U.K.-based publications reported, has been Willmott Dixon, which has taken about 33 days to get suppliers paid. Conversely, the worst performer is Murphy Group at 66 days.

Another company, the SEC Group, noted that companies would not be able to comply with payment-term laws that demand payments within specified terms. Those laws include the Supply Chain Payment Charter, which mandates payments within 30 days. The head of SEC Group, Rudi Klein, stated that the data is concerning.

“I am concerned that the existing legal requirements and charters are being ignored,” said Klein. “We are urging the government to put in place project bank accounts on all public sector projects. These will enable SMEs in these companies’ supply chains to be paid within 12 to 15 days. Everybody gets paid from the same ‘pot’ without cash having to travel along the cascading layers of contracting.”


India Gains Visibility In Late Payments Game

In India, small and mid-sized enterprises (SMEs) are gearing up to do battle in the war against late payments, stating that larger firms are taking time to pay. Some of those smaller firms have asked the Registrar of Companies (RoC) to strike off the names of some of the larger enterprises that are not paying on time.

The move comes as those smaller companies have cited mandates from the ministry of micro, small and medium enterprises, (MSMEs) and the Reserve Bank of India (RBI), that payments cannot be held back for more than 25 days. The smaller entities have stated that as many as 90 percent of the smaller firms that have closed have done so in light of slow payments from larger firms, a situation they claim is worsening.