Greater clarity from regulators and increased disclosure by companies is needed in order to prevent misuse of SCF by firms such as UK construction firm Carillion, insists the associate managing director at Moody’s, William Coley, speaking at the SCF Forum Europe.
The treatment of reverse factoring on balance sheets has been contentious and there have been fears that the product could be abused by unscrupulous firms. Coley says that this is an issue of mismanagement, rather than a problem with the product itself.
Criticism has been thrown at reverse factoring, but Coley claims that it is not inherently wrong. In fact, he asserts that it has many benefits; such as control over the supply chain. However, a lack of disclosure makes it a challenge to be fair. He argues that financing, whether SCF or not, needs to be assessed fairly agains its peers.
Coley said: “Reverse factoring can be a dangerous tool if not used correctly. A product which initially helps liquidity can be harmful to liquidity.”
He expanded upon this argument, claiming that the problem with SCF comes when companies consume the liquidity and then forget that it’s there. This liquidity management, or rather mismanagement, has led to company collapse or near collapses. Abengoa and Carillion are often cited, but Amazon and Procter & Gamble are both examples of where it’s been used successfully. Morrison’s were singled out for an example of best practice, disclosing and offering careful liquidity management.
Of the firms using SCF, less than 5 percent disclose it. It is this, Coley states, which is problematic. Drawing on research by conducted by Moody’s, Coley asserted that this continues to grow as an issue, with huge growth seen in the last three years. Adjustment for reverse factoring was also highlighted, with arguments made for debt being placed with suppliers, customers or being split. Coley described the argument as becoming ‘increasingly fraught’ saying that assessment at the moment is being made in a qualitative, not quantitative adjustment.