The government’s recent introduction of new measures to crack down on late payments forces large businesses to publicly report on how they pay small businesses, including the average time they take to pay suppliers. But this isn’t necessarily good news, says Tony Duggan, CEO of supply chain finance platform, Crossflow Payments.
At the end of May, his company polled SMEs to hear their reaction to these new measures. Three in four SMEs do not think new guidelines will have an impact on late payments, according to the findings, and with an estimated £266 billion of turnover locked up in late payments, the UK government too has a lot to gain from tackling the endemic culture of late payments.
The new measures implemented by the outgoing government in April are designed to drive up standards in payment practices by improving transparency in an attempt to tackle the chronic issue of late payments made by larger businesses to their suppliers. Large businesses will be required to report on their payment practices twice a year, including whether they pay their suppliers on time, and failing to do so carries a risk of criminal proceedings.
According to Duggan, large corporates are unlikely to reduce their own working capital by paying suppliers faster, particularly in the face of difficult trading conditions thanks to Brexit uncertainty. The only way they can justify responding to these reporting requirements is by implementing longer payment terms so that they are not seen to be paying late.
“The vast majority of SMEs we polled think the new payment reporting rules will do nothing to fix the late payment crisis. They are right. In fact, the new rules could make a bad situation worse,” he says. “An unintended consequence of the rules is that large corporates are likely to respond by negotiating longer payment terms with suppliers to shift the goalposts and create the illusion that they are paying on time. Add to the mix difficult trading conditions thanks to Brexit and we could see Britain’s late payment crisis deepen significantly.”
From his experience talking to corporates, Duggan believes there are only one of two options for large companies. “They can either fund any shortfall in their payment terms from their working capital, which is unlikely, or extend payment terms to meet the obligation. We’ve done the analysis of what it would cost a lot of corporates (including a grocery retailer with a turnover nearly £1 billion), and complying with the payment code would cost them upwards of £30 million. The natural thing to do for large corporates would be to standardise payment terms with suppliers to what works for them.”
While the code was a genuine attempt to do something to fix a long-standing problem, the business ecosystem and the government have a long way to go before late payments becomes a thing of the past, says Duggan. “Everyone either blames the corporate or SMEs. We’ve just got to move away from the blame game. Corporates aren’t going to give away their working capital easily. So we thought why not let the (SME) supplier use the corporate’s credit rating to secure low cost finance? We think there’s a circle to be squared here. By virtue of that, instead of worrying about financing 45 days at 10 per cent, which is a reality for a lot of SMEs right now, they can get the same amount to tide them over at 3 or 4 per cent.”
This is what his business does for the thousands of SMEs struggling to stay in the black. Unlike traditional invoice finance, the platform doesn’t require personal guarantees and according to Duggan is against hidden fees. “There are 18 to 20 different levers (traditional lenders) pull in terms of fees. From usage fees to recurring fees, when they advertise 6 per cent, it’s hardly ever really 6 per cent,” he explains. “SMEs need something straightforward. If they’re dealing with corporate X, and that company has a long payment term, the SME should be able to get access to finance at a lower rate based on corporate X’s credit rating. Essentially, the corporates are putting their credit rating on the table, and by default are also putting guarantees on the table for the SME.”
Crossflow Payments came about during Duggan’s long career in supply chain management. “I was responsible for the physical supply chain for Wicks, and one of the key issues for me was how to better align supply and demand. In terms of SME finance, we have the demand in terms of SMEs looking for finance. The question then becomes how can I secure a supply of finance for them? In the early days of Crossflow, we started talking to alternative sources of funding, and realised that we should create a bigger kind of supply to the market across many hedge funds and pension funds.”
After his days at Wicks, Duggan moved on to Swift, where he worked on a system for bank payment obligations. He left Swift and moved to HSBC to work on a similar project, looking at the payment obligation and transfer of debt framework, but when the financial crisis hit, the project got canned.
Like many other fintech entrepreneurs, Duggan decided to venture out on his own and launched Crossflow Payments, using similar mechanics as the transfer of debt framework, but to plug a huge gap in the SME finance market. “One of the key triggers for us came from a report we saw. The cost of providing supply chain finance for banks was 7.1 per cent. Then we dug further and looked at the usability of banks’ interfaces. This is why when big corporates roll out these sorts of frameworks, they don’t work. From a typical fintech approach, we identified the banks’ cost base and saw an opportunity to floor the cost on this and take market share very quickly.”
In those early years, Duggan self-financed the start-up and dedicated three years to developing the platform. “We’re not incurring an impairment rate (losses on loans), but for most big platforms, it’s around 8 per cent. If you take the rate into a real number, it’s something like £28 million. It scares me to death! Our cost base is pretty much zero because we put all that investment into R&D. We’ve done a lot of things right and we’ve done it early. We’re at break-even already, whereas other platforms are facing losses. If you have a low cost base, you’re going to have an advantage.”
