Carillion on 120-day payment terms and the Supply Chain Finance Scheme

Remember our old friend the Supply Chain Finance Scheme? Well, in the past couple of weeks, it's been making headlines once again - this time thanks to Carillion, the facilities management and construction services company.

In late March, several media reports covered Carillion's decision to operate on 120-day payment terms as standard, leaving suppliers waiting for up to four months for payment, a far cry from the 30-day terms most small businesses in particular would be likely to prefer.

A little ironically perhaps, Carillion responded by asserting that it has signed up to the voluntary Prompt Payment Code - meaning you might wait four months for payment, but at least it will be on time when it arrives.

Most interesting of all in Carillion's statement, however, is the section about the Supply Chain Finance Scheme, intended to allow businesses to access the funds they are owed on outstanding invoices by borrowing them from the banks, and then repaying the loan plus fees when the invoice is settled.

Carillion and the SCFS

Importantly, Carillion's Early Payment Facility allows its suppliers to use the SCFS to release funds from outstanding invoices owed to them by Carillion, on the understanding that Carillion will not only pay the invoice when it becomes due, but will also reimburse the supplier for any fees arising from the SCFS.

Carillion's statement on the issue includes several quotes from happy suppliers, saying things like "costs have been effectively zero", and "the system gives us the opportunity to take money earlier if we need to".

Oh really?

Drill down into the terms and conditions of the Carillion Early Payment Facility, and the 'zero-cost' claim begins to look a little shaky.

For instance, while Carillion claim the 120 days is based on the deadline by which they have to pay RBS for any invoices that have become subject to the SCFS, suppliers wishing to access their funds ahead of previously agreed terms will be expected to pay the fees for doing so themselves - at 1.65% above the current LIBOR rate, multiplied by the amount of their 'loan', for each day early that the funds are withdrawn.

Even for suppliers willing to pay this cost for early access to their funds, there is still a provision to delay payment to beyond 30 days, as Carillion say "invoices will still need to be approved for payment", and that "Carillion will expect to take a maximum of 30 days from invoice receipt to review and approve the invoice".

In short, Carillion's EPF still might not allow you to access your funds within 30 days - and will charge you for the privilege if you do.

Carillion's response to FAQs

Carillion recognises that there are two Frequently Asked Questions about this move:

1. Does Carillion expect all suppliers to extend their terms?

Carillion say:

"Carillion negotiates payment terms with its suppliers, as part of the normal course of business, and this results in a wide range of payment terms. In addition, Carillion has introduced its EPF, which is helping to improve access to credit and cash flow for our suppliers."

In plain English: Yes, they do.

2. Why is Carillion asking suppliers to extend payment terms while also providing the EPF, which enables them to be paid earlier - why not just stick to the original terms and pay in line with them?

Carillion say:

"The introduction of standard payment terms of 120 days is part of the EPF package and defines the period within which Carillion has to settle payments to the Bank with which Carillion has put the EPF arrangements in place.

"This gives Carillion greater flexibility in terms of managing its own working capital.As indicated in the explanation of the EPF above, all suppliers gain the flexibility to decide when they receive payments in respect of approved invoices and most suppliers can benefit financially, because they can receive payments earlier than under their existing terms."

In plain English: Carillion say it best themselves. "This gives Carillion greater flexibility in terms of managing its own working capital." In effect, all suppliers have been put on 120-day payment terms, and those who want their money sooner can expect to pay for it. Carillion's own cash flow is the only clear driving force behind the move.

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