The payment terms swindle
In the aftermath of the collapse of Carillion, it’s clear that SMEs on private sector contracts with the liquidated multinational look set to suffer badly. According to a top accountant at UHY Hacker Young, such suppliers are likely to receive less than 1 pence for every pound they are owed, leading to a potential wave of insolvency rippling down Carillion’s supply chain.
Estimates of the number of businesses owed money are in the range of 25,000 to 30,000. Suzannah Nichol, the chief executive of the trade body Build UK, noted that in “previous cases where large contractors have collapsed, you typically see that around 17% or 18% of businesses who are creditors… don’t make it through the next five years.”
In the days and months before its collapse, Carillion cast about desperately for anyone willing to lend them money. Finding no one was foolish enough to do this, they even went cap in hand to the government begging for £150m in the hope that short-term financing would secure new investors. No private company in their right mind was willing to loan Carillion money, and yet that is precisely what suppliers were being forced to do by the mechanism of delayed payment terms.
Carillion’s suppliers, whose contracts delayed their being paid for as long as possible, were effectively bankrolling the multinational, whose market cap hovered around the £1 billion mark a little less than 8 months ago. Most of the time the routine delay for suppliers getting paid doesn’t make the news. Only when something as momentous as this happens is light cast upon the routine abuse of suppliers by their clients.
Operators in oil and gas are among the worst offenders for delayed payments. It’s considered completely acceptable for clients to expect SMEs to effectively bankroll them. Without access to the operator’s line of credit, the supplier is forced either to take out a loan to bridge the gap (something that suppliers we talk to hate doing) or they are forced to forgo work that they could have taken on if they had better access to financing.
At DeepStream we accept that cashflow is an important issue for buyers, but we also understand the critical need on the supplier side. As a result we encourage our suppliers to use our system to negotiate payment terms that work for both them and their clients.
We are also proud to say that we will be offering instant access to invoice financing through DeepStream. This will allows suppliers using our platform access to the financial resources they need to master their cashflow. Transacting through a network gives a more transparent invoicing system where buyers can confirm invoices, and lenders are happier to lend. We are also developing proprietary shared ledger technology to create an infrastructure where lenders have more visibility over the supply chain that a supplier is part of, breaking down the information barriers that ultimately lead to higher financing costs for suppliers. Being part of the DeepStream network will allow suppliers, in nearly all instances, to borrow funds at a more competitive rate than they otherwise would just going to their regular lender.
In an ideal world, buyers would always offer fair payment terms, but it’s hard to escape the current reality that buyers push hard for terms that favour their own cashflow. But until there is a paradigm shift in oil and gas, we hope that the access to invoice financing will ease the burden for suppliers on DeepStream, and we hope that we can build towards a procurement model that encourages collaboration for mutual benefit rather than the current one-sided approach.