The Big Four auditing firms — EY, Deloitte, KPMG and PwC — have recently requested that the Financial Accounting Standards Board (FASB) provide clarity in how corporates should classify their reverse factoring or supply chain financing agreements, adding more fuel to a long-standing debate as to whether such trade financing tools are debt.
A closer look at the discussion reveals why the uncertainty has been causing more concern than usual: in addition to the FASB introducing new accounting standards, the Big Four’s letter pointing to the rising reliance on such supplier financing agreements, as corporates look to expand their payment terms.
“Suppliers are more likely to accept extended payment terms when the purchaser has arranged a structured payable program that permits the suppliers to monetize their trade receivables before its due date,” their letter stated, according to Compliance Week reports. They added that evolving B2B payment terms have led suppliers that have historically managed days sales outstanding (DSO) between 60 and 90 days to manage payment terms of 180, 210 or even as long as 364 days.
According to the accounting firms, there has been “an increase in companies working with intermediaries to arrange trade payable programs, and an evolution in the types of such programs that are offered in the marketplace.”
Adding to the controversy is the growing scrutiny over such supplier financing programs, which financial analysts warn have played a prominent role in several high-profile corporate collapses, like that of Carillion. As the accounting industry continues to debate whether supply chain financing should be classified as debt, PYMNTS takes a look at the deeper issue at hand in a roundup of the newest in late payments headlines.
SMBs Warned In India
The issue of late payments is often considered an issue of leverage, with large corporate buyers forcing lengthy payment terms on small suppliers. However, according to Financial Express data, in India, it’s small businesses (SMBs) that are more likely to delay payment to their vendors.
The publication analyzed data on more than 300 businesses, using information from the Ministry of Corporate Affairs, and found that, on average, large companies pay suppliers in an average of 86 days, while SMBs take about 119 days. Analysts pointed to the broader availability of affordable financing as a key factor behind large corporates’ ability to pay more quickly, as well as regulations that require big firms to pay SMBs within 45 days — and found that compliance to that regulation is on the rise.
Scottish Firms Fair Non-Payment
Recent reports in Daily Business Group revealed SMBs in Scotland are hesitant to export across borders for fear of late and non-payment.
Censuswide, on behalf of UK Export Finance, surveyed small businesses and found that 22 percent of Scottish firms pointed to the risk of non-payment from foreign customers as a key inhibitor of their global expansion efforts. Analysts calculated that, at any given time, SMBs are owed an average of $82,000 in outstanding receivables.
According to UK Export Finance CEO Louis Taylor, this strain of late payments makes access to financing options more important, with agreement from Secretary of State for International Trade Liz Truss.
“Finance is a key barrier coming between [SMBs] and their export potential,” said Truss in a statement.
Europe’s Business Insolvency Risk
The latest in delayed B2B payments from Atradius warns that cash-flow constraints are likely to cause a rise in business insolvencies across Western Europe. In a press release last week, Atradius highlighted the findings of its “October 2019 Atradius Payment Practices Barometer survey for Western Europe,” which found an increase in the portion of businesses offering trade credit to their B2B customers.
More than 60 percent of the total value of B2B trade conducted in the last year was done so on trade credit, the report found. Furthermore, nearly 30 percent of the total value of B2B invoices issued in the region in the last year were unpaid by that bill’s due date, though analysts noted that vendors have been reluctant to expand payment terms, leading to average DSOs remaining relatively constant.
Australia To Address Reverse Factoring Controversy
SmartCompany reported last week that Australia’s Minister for Employment, Skills, Small and Family Business Michaelia Cash is gearing up for the government to address reverse factoring arrangements, as calls for regulation to combat late B2B payments grow.
In response to the Australian Small Business and Family Enterprise Ombudsman’s (ASBFEO) report earlier this year, which established 10 recommendations to improve SMB payment times, Cash slammed payment terms to small suppliers that extend beyond 30 days as “unacceptable.” An official response from the department, though, including its thoughts on reverse factoring, is still in the works.
Among the 10 recommendations was for the ASBFEO to review reverse factoring or supply chain financing, and the impact on small suppliers, as some critics argue that the financing tool forces small businesses to accept longer payment terms and offer a discount on their outstanding invoices. Reports said the Australian Competition and Consumer Commission is already probing the financing tool, as officials warn of an increase in its use over the last six months.
“At this point, what they’re doing is absolutely legal,” said Small Business and Family Enterprise Ombudsman Kate Carnell of large corporates’ use of reverse factoring. “We believe it’s really inappropriate. … I don’t think anybody thinks it’s reasonable to extend payment times.”