Following our conversations on Twitter and Linkedin last weekend (see the ‘storify’ below), Carillion has issued a statement about its new 120 day standard payment terms, Grant Roxburgh wrote to his MP, Building has written a followup article about the interest of MPs in the subject, and Construction Manager has interviewed the Group Corporate Affairs Director, who says the 120 day standard terms are in fact a ‘technicality of reverse factoring’ and optional.
I don’t have any expertise in this area, I’m just listening to what is being said and curating it together. As a result I’ve been approached by various people who ‘would like to talk’. Not being an expert in credit, I’d rather let the experts talk, so are you an expert? Do you know one? If you are please add your views below. Is this approach to credit really reasonable, or is it about easing ones own borrowing problems by using ones SME creditors as an alternative bank?
NB. I’ve included extracts from the Building articles in the ‘storify’ below, but you will need to register on the site to read them in full. Registration is free.
What people are saying about Carillion’s new 120 day payment terms
On Saturday 23 March I spotted a status update by Grant Roxburgh on Linkedin. He shared a story from Building Magazine about Carillion, one of the major UK Main Contractors, switching to a 120 day payment plan. This is my curation of what was said on Linkedin and twitter in the hours that followed.
Storified by Su Butcher· Thu, Mar 28 2013 06:16:54
We have a very wide range of payment terms which are negotiated with all of our suppliers on an individual basis. These range from our standard terms, which we extended last year to 120 days, to payments in advance for some of our smaller suppliers.
We are also working on a range of initiatives that will help to improve access to credit and cash flow management for our supply chain.
One of these initiatives is our Early Payment Facility (EPF) which we relaunched last year in support of the Government’s Supply Chain Finance Initiative which aims to improve cash flow in the supply chain.
At the time the Prime Minister said: “I praise the commitment made by these businesses today and the wider support they provide for their supply chains. In the current climate, viable business 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.”
In addition we recently held an event, which was supported by a senior government advisor, to provide an insight into Supply Chain Finance and the associated benefits for suppliers. Carillion has also recently signed the Government’s Prompt Payment Code.
A large number of key suppliers have already signed up to the scheme and the feedback has been very positive. Many more suppliers are in the process of joining as they recognise the benefits.
How does our Early Payment Facility work?
1. The EPF programme enables many of our suppliers to receive payments against approved invoices in advance of their current contractual terms and this facility is being rolled out progressively to our suppliers. Please refer to this leaflet for further details about the EPF.
2. Carillion is not charging for this facility and payments will continue to be made to suppliers in line with existing terms at no cost. The only fees associated with this facility are those incurred when the supplier chooses to access funds earlier than the existing payment terms.
3. Independently of this, Carillion is increasing our standard payment terms to 120 days with a Supplier Incentive Scheme in place to ensure the supplier’s financial position is not detrimentally affected by the change in terms versus current position. BUT, as already explained, payments will continue to made against existing terms at no cost, including those subject to Public Sector Fair Payment Charters.
4. Irrespective of current payment terms, all preferred suppliers will have the opportunity to access payment early through the EPF at very competitive bank rates; far lower than most small and medium sized businesses (SME’s) would be able to access via traditional routes.
5. Suppliers who work on contracts subject to Public Sector Fair Payment Charters will be able to receive payment in line with those terms at no cost to themselves.
6. In essence, our EPF gives our suppliers access to working capital by enabling them to borrow against Carillion’s balance sheet, either at no cost to themselves, or at fees that are more competitive in comparison with typical bank borrowing.
This initiative is designed to help businesses, particularly small and medium sized enterprises (SME’s) to improve their cash flow and reduce their borrowing requirements at a time when many SMEs are unable to borrow from banks.
Frequently Asked Questions
Q. Is it expected that all Carillion suppliers extend their terms?
A. Carillion has a very wide range of payment terms ranging from payments in advance up to our standard terms. We negotiate payment terms with all our suppliers on an individual basis and we are working on a range of initiatives, such as the EPF, which will help to improve access to credit and cash flow management for our supply chain.
Q. Why is Carillion requesting that suppliers extend payment terms whilst also providing the EPF which enables them to get paid ‘early’? Why not just stick to original terms and pay in line with these?
A. The extension of our standard payment terms provides Carillion with greater payment flexibility. BUT, as already explained, all of our suppliers have the opportunity to use our EPF, regardless of the terms that they are on, to receive payments either earlier than they do now, or no later, at no cost to themselves.
We hope that this helps to address concerns which may have been caused by the recent negative coverage around this issue. However, if you would like further information or have any questions about our supplier payment arrangements please contact us.”
Last week, Building revealed the firm had extended its payment terms to 120 days and is implementing “reverse factoring”, a financial mechanism that allows suppliers to be paid early if they pay a charge to the bank.
Carillion says that the scheme is optional and that it is offering to reimburse suppliers for the bank charges to ensure they are no worse off. The company says the system is aligned with the government’s Supply Chain Finance scheme – itself a form of reverse factoring that is aimed at easing cash flow through the supply chain.
But Labour’s shadow business secretary Chuka Umunna (pictured) said the suggestion Carillion may be using the government’s finance scheme to “perpetuate late payment” was “worrying”. “Where large firms are abusing their position to give suppliers increasingly unfair payment terms – effectively forcing their suppliers to bankroll them – this is an unacceptable practice and must be stopped,” he said.
A spokesperson for the Department for Business, Innovation and Skills, would not comment on Carillion’s scheme, but said Supply Chain Finance “should not be used as an alternative to prompt payment”.
This week Carillion defended the scheme with a statement on its website after the news prompted a campaign on social media site Twitter, with users promoting the hashtag #DontWorkWithCarillion to express their views.
Carillion confirmed that payment in 120 days was now its “standard terms”, but said that some small suppliers got paid earlier. “We have a very wide range of payment terms which are negotiated with all of our suppliers on an individual basis,” the firm said.
Carillion said around 120 firms had signed up to work under the new system, with a further 50 in the process. “The feedback has been very positive,” the firm said.”
Click link below for full article:
Here’s my idea for a TRUE win-win. Major Contractors utilise the reverse factoring facility being made available to them in order to strengthen their balance sheets and improve cash flow for their valued supply chain partners.
Example: A £10,000 invoice submitted by a supplier on 65 days from application or invoice month-end payment terms would be paid on 30 days, i.e. 35 days earlier.
The major contractor pays a nominal finance charge of £21* in order to access greatly extended credit terms on its purchase ledger and to ensure that it’s supplier is paid promptly. That’s a cost to the major contractor of just 60p for each day of extended credit.
The benefits to the parties are clear. The major contractor leverages it’s position in the market in order to strengthen its balance sheet AND the sustainability of its supply chain. The suppliers receive a major cash-flow boost at a time when it is needed most.
IS THAT NOT A TRUE WIN-WIN?
*Example uses fee calculated as £10,000 x (Libor 3M +1.65%) x 25
days /365 . Exact fees will be confirmed in due course.
However, Denning said that the 120-day limit is in fact a legal technicality of reverse factoring, as suppliers will remain on their existing contractual terms.
“It defines the period within which Carillion has to pay the bank, and so it gives us more flexibility to have our working capital for longer. If we hadn’t introduced something to give us more flexibility then there would be no benefit to us in the scheme, just costs.”
Denning said that similar systems have been available in other sectors for around 10 years, and that Citibank and Santander are also active in this area. Balfour Beatty is believed to be looking at a similar scheme.
Denning admitted that the scheme is “opaque”, but said: “We feel a bit aggrieved – we were trying to help when the government is asking for help. It’s not suitable for everyone but we’re offering it and saying ‘would you like to try it’. If they don’t like it, they’re on their normal terms.”
“But if you’re a supplier having trouble borrowing from the bank, then you have the ability to get access to cash at roughly a 2% interest charge. The SME is borrowing against Carillion’s [borrowing] covenant to get money cheaply if they want it.”