SCF, the side effects
These traditional SCF, SCF 1.0, programmes are not without problems for the buyers either. Taking an analogy from medicine, certain “unwanted side effects” have been observed in some users of SCF 1.0.
Many SCF programmes have met considerable scrutiny by auditors recently, and in some cases payables under the programme have been reclassified as debt. The fact that SCF 1.0 programmes rely on approved invoices does not help here, since a binding irrevocable commitment to pay may be viewed as a characteristic of debt rather than payables. The accounting concerns can usually be resolved, but require a lot of attention and are often considered a meaningful risk.
In the febrile atmosphere that surrounds the late payment problem, SCF can also fail the “front page test” as it is only used by the select few. In other words, most corporations wouldn’t want to see in the national press the fact that SCF pays other big companies only days after an invoice is approved, while smaller suppliers go under after waiting months for payment.
Information is increasingly easy to come by and consumers are becoming more activist in their purchasing habits. In fact, the treatment of suppliers ranks in the top five reasons shoppers boycott a brand . Being perceived to be treating small, entrepreneurial suppliers unfairly can have a real impact on the bottom line and the share price.
Furthermore, long payment terms can reduce the range of suppliers available to a buyer. If a buyer calls for a tender for certain goods to be delivered in 9 months, very common in for example the fashion industry, then only those suppliers with large enough balance sheets will be able to participate. A host of smaller, and perhaps much better, suppliers simply cannot afford to fund the 9 months of working capital needed to participate in such a tender.
Finally, as large buyers have extended payment terms, and SMEs have not had access to effective funding, the increased financing costs of the SMEs may feed into the price paid by the buyer for the goods or services.