Companies are finding savings in paying their bills early.
The use of reverse factoring, a type of supply-chain financing solution, has been steadily increasing across the globe. In reverse factoring, a company or its financing partner pays a supplier’s invoice upfront or before the usual payment date, but at a discounted rate. Credit rating agency Fitch Ratings warned in 2018 that reverse factoring effectively served as a “debt loophole,” and that use of this financing instrument has ballooned, though no one knows by exactly how much.
One reason behind the greater use of reverse factoring has been corporations’ increasing delays in payments to their suppliers. This was highlighted in October, when UGL Engineering of Australia pushed its payment deadline to suppliers to 65 days from the end of the month in which invoices are received.
UGL is owned by Cimic Group, Australia’s largest construction company. Before this change, contractors dealing with Cimic were paid within 30 days. UGL told its suppliers if they wanted to be paid sooner than the new 65-day period, they should work with its financing partner, Greensill Capital. But UGL didn’t specify the cost of the timelier payment.
Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), whose office has conducted several investigations into payment terms, condemned UGL’s actions. In a statement posted in February on the office’s website, she said if big businesses continues to flout reasonable payment terms, she will have no choice but to recommend federal legislation requiring all businesses to be paid in 30 days. The Australian government has been operating the ASBFEO office since March 2016.
“The economic case for faster payment times is clear, not just in Australia but internationally,” Carnell said in the statement. She cited a Harvard Business School study that found that the adoption of 15-day payment times by the administration of former US President Barack Obama created 75,000 jobs and delivered an additional $6 billion to US workers’ pay.