Call for shakeup of supply chain financing following Greensill debacle

It is the common thread running through the disastrous collapses of Carillion, NMC Health and now Greensill Capital.

Yet supply chain financing is also championed by scores of reputable business, from Rolls-Royce to Vodafone and Astrazeneca.

Now the Greensill scandal has prompted calls for a change to accounting rules to force firms to be more transparent about their borrowings. Critics warn many companies could be using supply chain finance to disguise ‘hidden debt’ on their balance sheets.

Greensill was one of the biggest champions of this way of lending. In the past decade alone, the London-based firm extended more than £108billion ($150billion) worth of financing to some 8m customers and suppliers in more than 175 countries – with the full reach of its activities still not completely understood.

But Greensill – founded by Lex Greensill – collapsed when backers abandoned it over concerns about the value of its assets, triggering a crisis that has put thousands of jobs at risk as the firm’s borrowers have been left in the lurch.

Lord Sikka, a professor of accounting and Labour peer, said: ‘Supply chain financing was one of the things behind the collapse of Carillion and NMC Health. There were warnings then that something needed to be done – yet nothing has happened and there is still no urgency from the regulators.’

Supply chain financing – also known as reverse factoring – is where a company brings in a middleman to pay a supplier on its behalf. 

In many cases, this is done through so-called ‘early payment’ schemes – where suppliers are offered the chance to be paid early, but at a discount, by the lender. 

The company that bought goods from the supplier then settles the debt with the lender later on. The lender makes money by taking a share of the discount taken off a supplier’s payment.

Supporters say the ‘win-win’ arrangement allows suppliers to get paid promptly, while big businesses can smooth out their flow of outgoings.

Telecoms giant Vodafone runs such a scheme, used by some 3,500 suppliers, through which it made nearly £2.1billion worth of payments in the year to March 30 2020, according to its annual report. 

And Astrazeneca, which produced the Oxford University coronavirus vaccine, ran one worth £180million that involved 3,400 suppliers as of December 2020. 

Both used Greensill in their schemes but yesterday said its collapse would not affect their finances. Yet other uses of supply chain financing are more opaque, experts say. 

Although primarily used for short-term payments, Greensill turned the loans into complicated products that were not what they seemed at first. 

Supply chain finance was singled out by MPs and ratings agencies in 2018 as one reason that outsourcer Carillion’s impending collapse was not spotted sooner.

Professor Alex Yang, associate professor at the London Business School, has called for accounting rules to be urgently reformed to take into account borrowing via supply chain financing. 

This is because, like Carillion and others, many firms class cash owed through these schemes as short-term ‘trade payables’ – and not long-term debt. 

But there is no requirement to disclose supply chain financing arrangements specifically to investors.

Yang said: ‘Businesses should explain supply chain finance arrangements.’