Supply Chain Finance scheme
Tuesday 23 October 2012
PM appeals to large business to support the Supply Chain Finance scheme and help SMEs, secure increased levels of affordable finance and support job growth
The Prime Minister is holding a roundtable meeting with some of the UK’s largest companies to seek their support for an innovative new scheme that will help tens of thousands of businesses in the UK, many of which are SMEs, secure increased levels of affordable finance, helping to support job growth and aspiring businesses get ahead.
Supply Chain Finance (SCF) is an innovative way for large companies to help their supply chain access credit, improve cash-flow and at a much lower cost, and has already been successfully implemented by companies including Rolls Royce and Vodafone.
With Supply Chain Finance a bank is notified by a large company that an invoice has been approved for payment; the bank is then able to offer a 100 per cent immediate advance to the supplier at lower interest rates, knowing the invoice will be paid.
Taken together, this means that leading companies could deliver up to as much as £20 billion of new cheaper, finance to their suppliers, including many UK SMEs.
The Prime Minister also announced that the Government will look to, where it can, offer this to its own suppliers, starting with the first UK Government Supply Chain Finance scheme for community pharmacies in England, unlocking up to £800m of new credit for around 4,500 pharmacy businesses, many of which are SMEs.
The Government believes that this is a major step that could be taken to boost growth, particularly for SMEs.
Prime Minister David Cameron said:
“This Government is determined to back all those businesses who aspire to get ahead and take on more people. In the current climate, viable businesses can struggle to get the finance they need to grow – this scheme will not only help them secure finance and support cash flow, but will help secure supply chains for some of our biggest companies and protect thousands of jobs. It can be a win-win, with large companies and small suppliers both benefiting from this innovative scheme.”
John Walker, National Chairman, Federation of Small Businesses said:
“The new Supply Chain Finance scheme could help smaller firms in two key areas – improving their working capital and tackling the issue of late payments. Nearly three quarters of small businesses report that they have been paid late in the past year, placing a huge strain on cash-flow and meaning they struggle to realise ambitions to grow.
“The FSB welcomes the Government’s commitment to helping small firms secure finance. We encourage large companies to support and implement the scheme, so that it can play its part in improving confidence and encouraging growth throughout the supply chain.”
The Government is keen to ensure that SMEs have the widest range of credit options available to them and is taking action on a number of fronts to deliver this. This includes:
- The Funding for Lending scheme to encourage banks to boost lending in the UK economy
- The Enterprise Finance Guarantee – A loan guarantee programme which has helped more than 18,000 small firms obtain bank finance
- More than £160m invested in high-growth UK firm through support for the UK Venture Capital industry
- Generous tax schemes for people investing in start-ups and growing companies in UK
- A new £82.5m Start-Up loan programme to help young people start their own businesses
Supply Chain Finance
Major UK companies generally have strong credit ratings and excellent access to finance. This contrasts with the SME suppliers to those major UK companies, who often have relatively more expensive finance, and more limited access to equity capital.
The largest component of SME financing is “working capital” funding. SMEs generally fund their working capital via overdrafts, invoice discounting or factoring or similar products. These products are generally more expensive than their customer’s cost of credit and provide the SME with an advance rate of around 80% – with the rest coming from equity capital. This makes it relatively more challenging and expensive for SMEs to grow.
With Supply Chain Finance a bank is notified by a large company that an invoice has been approved for payment; the bank is then able to offer a 100 per cent immediate advance to the supplier at lower interest rates based upon their customer’s credit rating (i.e. the major UK company), knowing the invoice will be paid.
The benefits of Supply Chain Finance are:
- It provides cheap funding to suppliers based on the credit quality of their customers
- It allows suppliers to receive 100 per cent of the invoice value rather than the 70 to 90 per cent generally offered through traditional finance products for SMEs. This can help free up money for growth, boost cash-flow or allow businesses to refinance existing debt
- It can help supply chains to become more efficient as the overall cost of finance is reduced
- It allows banks to provide finance to SMEs in a significantly more capital efficient manner (which will unlock capital for them to potentially provide yet more lending to SMEs)
SCF was recommended by the Breedon Taskforce on Non-Bank Lending.
Community pharmacies dispense around 80 million NHS prescription items every month. They then claim payment from the NHS for the products and services provided.
The amount they are owed is calculated by the NHS Business Services Authority (NHSBSA), but with such high volumes to process, this takes time. Typically, pharmacy contractors receive an estimated 80 per cent of their payment within four weeks of sending their prescriptions to the NHSBSA with the balance being paid the following month. It can therefore take eight weeks before payment is made in full. However in the meantime, suppliers need to be paid and many pharmacy businesses use commercial loans – which are often expensive – to maintain cash flow.
In the Supply Chain Finance system, a bank will make the NHSBSA’s estimated payment available to the pharmacist at around day seven. This means they will have access to money more quickly instead of having to wait for the first payment at the end of the month. In accessing the money early, they will need to pay interest, but it will be at a much lower cost than any borrowing arrangement they could usually access.
The Supply Chain Finance scheme could help reduce this cost of borrowing. Around 4,500 pharmacy businesses will be able to get access to approximately £800 million of credit at a much lower cost than they do now. This means pharmacies will have access to cheap finance to help cover their suppliers’ bills.