The Great Late Payments Scandal

Jeremy Corbyn recently declared war on big businesses who sit on hoards of money and restrict cash flow in the supply chain. He criticised them for profiting from what amount to interest-free loans provided by their suppliers, who don’t have the resources to put their foot down on the late payments.

He suggested that the late payment scandal is worth £26 billion a year and hits SMEs with monumental force and in some cases can put them out of business.

Corbyn has hit a raw nerve but the problem is even greater than he thinks. Recent research suggests slow and late invoices cost SMEs a staggering £250 billion a year, taking into account the cost of chasing and the value of unpaid invoices. A recent whitepaper from VendorMach, showed that late payments is a real issue with Wholesale businesses waiting 141 days to get their invoices paid. Other industries – Manufacturing – it takes them 96 days – over three months to collect invoice payments. Even those in health care are affected – 64.5 days to get invoices paid.

Technology-driven finance

The solution to that dilemma comes in two parts: trade finance or credit insurance can offer a way for both buyers and suppliers to take more value out of the process, but to work effectively, it requires robust technology underpinning automated transactions.

Supply chain or trade finance is most often employed when a larger buyer has better credit scores than its supplier and can, therefore, access capital more cheaply. Using this advantage, it is able to negotiate better payment terms so that its cash is retained for longer (or used for other purposes). Meanwhile, the supplier can access cheaper capital by selling its receivables – it can, therefore, secure payment earlier.

Imagine a transaction in which ABC Plc buys goods from XYZ Plc. Having received XYZ’s goods and, subsequently, its invoice, it promises to settle the bill in 30 days’ time. Now, XYZ decides it wants its money more quickly – it can request immediate payment from ABC’s finance provider, using the approved invoice as security. The money is handed over, minus a small discount for early settlement, and then gets its money back from ABC. It may well not require repayment for a further 30 days.

The net effect of this transaction is that XYZ is paid more quickly than usual, while ABC hasn’t had to sacrifice cash flow. In fact, it may even secure a longer period in which to settle its bill – 60 days in this example. Unusually, given the nature of the supply chain, both parties are better off.

However, while such finance is not a new concept, it does require robust technology solutions to work effectively at scale. Supply chain finance typically requires a digital platform on which transactions can be automated, tracked and settled. That will be enhanced when buyers have digitised their supplier relationships with key data and insight available on who their critical suppliers are, what their real-time operations are, their liquidity, security and other credibility. Also, what the creditworthiness of the suppliers’ partners and what other alternatives exist in the market, ultimately determining whether there is a future problem. Imagine a buyer who offers a facility to a key supplier and soon after discovers that the supplier is going out of business and or is changing ownership.

Better technology will enable you to manage the whole of your supply chain much more effectively – both individually and in aggregate. VendorMach has developed a network driven platform, which uses artificial intelligence to solve these inefficiencies between buyers and SME suppliers. It replaces outdated manual processes which currently consume the resources of supply chain professionals.

By digitising your supply chain management, you free up resources for more value-added tasks – and gain access to new tools that will give you a real-time view of your supply chain resilience.

Supply chain efficiency for all

Building such systems is in the interests of all parties. While supply chain payment issues are more likely to disadvantage smaller suppliers – and large buyers are often accused of throwing their weight around unfairly – even leaving aside the potential to secure extended payment terms, the larger buyer can benefit.

What most such buyers need above all – and certainly more than short-term cost or cash flow gains – is a robust and resilient supply chain on which they can depend for the long term. Where small suppliers are struggling to prosper, or ever to survive, because of cashflow problems brought on by payment delays, the buyer’s interests may be compromised.

In this sense, collaboration is more than just a buzzword. By working together using innovative financing solutions and digital technologies that promote visibility, buyers and suppliers alike will both secure short-term gains – cash flow benefits – and long-term advantages – supply chain resilience.

Unlocking even a relatively small proportion of that trapped value, while simultaneously securing better payment terms for many larger suppliers, would provide a powerful boost to huge numbers of businesses. It would also end the scandal that cripples the growth of many British businesses.

Chaney Ojinnaka – Biography

Chaney Ojinnaka is the CEO of VendorMach, a start-up business working to revolutionise the relationship between businesses and their suppliers, using digital technologies, big data and analytics tools, and enterprise intelligence to the mutual benefit of every party in the supply chain. VendorMach has just launched on Seedrs.

Chaney is a serial entrepreneur who holds an MBA from the University of Chicago’s Booth School of Business. Chaney’s career has spanned both sides of the Atlantic and included senior management positions at Fortune 500 insurance companies and periods running his own ventures; he moved to Europe as Entrepreneur in Residence at Startupbootcamp in Berlin before launching VendorMach in early in 2015.

Chaney Ojinnaka, the CEO of VendorMach

Author: Dylan Jones

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