The Dutch government recently passed a new payment term law that says that buyers can’t offer their small and medium-sized suppliers (SMEs) payment terms of more than 60 days. It’s a well-intentioned piece of legislation, but the reality is that it will have a negative impact on many SMEs.
Here are a few examples:
- Lose access to Reverse Factoring (RF) or Buyer’s Supply Chain Finance (SCF) programme
- Be forced into a Dynamic Discounting or other Discount or P-card programme
- Revert to Net 60 day terms
- End up in some legal dispute with their customer
- Lose the business altogether
For SMEs that rely on Buyers’ RF or SCF programmes to expedite cash flow, the fallout of this legislation will be particularly damaging. Financing options for many of these suppliers are limited.
Based on my experience, a Netherlands-based program would have a financing rate to the SME of something between 1% and 3% as the ANNUAL PERCENTAGE RATE. Even in the worst case, a rate of 3% on 120-day terms would yield a discount of less than 1% to receive cash on day 10. Backing this down to a more standard rate of even 2% and a 90-day term would result in a discount of less than 0.50% for payment on day 10. This is substantially less expensive than any other option available to the SME, whether that is self-financing a shorter term of 60 days, being “invited” to participate in a dynamic discounting program where the discount rate typically starts at 2% of face value (and only goes up from there) or some other static discount or P-card programme.
Unless there is an exclusion for reverse factoring and supply chain finance programmes, this legislation can only result in a negative economic outcome for the SME with the consequence ranging from more expense to receive payment on the same day to losing the business altogether.
This legislation is one more example of how reverse factoring and supply chain finance are often misunderstood in the marketplace. These programmes are just as beneficial to SME suppliers as they are to the buyers that implement them. In some cases, the benefits for SME suppliers are actually greater. As challenging as it is for large businesses to improve cash flow and optimize working capital in today’s business climate, it’s far more challenging for SMEs.
It should be noted that many businesses are currently expanding their reverse factoring and supply chain finance programmes to SME suppliers, and that’s opening doors of opportunity for those smaller businesses.
Kiddyum, a UK-based maker of frozen children’s meals, reached a pivotal moment when it signed one of the largest supermarket chains in the UK as a customer. To satisfy the customer’s order, Kiddyum needed immediate access to working capital to pay for production, warehousing and distribution costs. Participating in the customer’s supply chain finance programme provided Kiddyum the immediate liquidity it needed. Founder Jane Hynes calls it “an absolute lifeline” to keeping the business responsive during a fast-growth period.
If the government wants to really help SMEs and their local economies, they should be providing more incentive for buyers to expand their reverse factoring and supply chain finance programmes to SMEs – not less!