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EU payment regulation dismantles “old school” Supply Chain Finance

Luca Mattia Gelsomino

date: June 9, 2021

Luca Gelsomino writes about the the adoption of the European Directive on Unfair Trade Practices in the food industry (UTP) by the 27 EU member state from November 2021, the opportunities it produces and the possible consequences of this new directive.

What’s going to happen in November 2021? Maybe, like in the past, we will be flying to Amsterdam to join the SCF Forum at the Beurs van Berlage, maybe not. One thing will happen with much more certainty. The adoption of the European Directive on Unfair Trade Practices in the food industry (UTP) by the 27 EU member states. From that moment on (or earlier, if any member state adopts prior to this deadline), companies within the food industry will have six months to adjust payment terms in existing contracts.

What does this directive imply? In a nutshell: suppliers smaller than their buyers shall receive contractual payment terms of no more than 30 days for perishable goods, and no more than 60 days for non-perishable goods, no exceptions.

Rumour has it

The impact of the directive on SCF programme is clear. The old adage of payment terms extension as the key benefit and motivation of SCF programmes might be at its end in this industry. Buyers would have to absorb a large working capital investment to move from 90+ to anywhere in between 30 to 60 days, while at the same time suppliers would be paid exactly as before, in a matter of days, and thus will be unwilling to provide extra kick-back to their buyers (sure, they would save 60 to 30 days of interest charges, but nowadays that is essentially negligible in terms of bottom-line impact). Would SCF programme survive? The answer is likely country-dependant, as payment terms (and related costs) still tend to vary hugely across Europe. Rumour has it that some countries are translating the directive in laws that are stricter than the original EU text, with a potential exacerbation of the issues illustrated here above. Whatever the case, there is no doubt that we are looking at a major game-changer for buyers in the food industry, as well as for their SCF programmes.

But is this a bad thing? Not necessarily. It’s an opportunity.

Opportunities

The opportunity resides in shifting the focus of existing SCF programmes from a payment term extension machine into a strategic tool in the company joint supply chain and finance strategy. We have seen in these daring times how SCF (and reverse factoring specifically) can act as a tool to reduce risk in the supply chain: buyers use their programme to keep suppliers afloat, by providing them quick access to much-needed liquidity. We have witnessed SCF entering business continuity plans and the sustainability department. This is the key to read the directive: a firm push towards seeing SCF as a bigger tool than what it was in the past.

After all, this is nothing new. PUMA (together with LEVI’s and NIKE) has run a reverse factoring programme for several years in which not only payment terms are not extended, but in which suppliers receive discounts on the invoice purchase cost based on their sustainability performance. They are even extending this to purchase order-financing.

We have documented SCF programmes, in China, extended towards second, third and even tenth tier of suppliers, providing liquidity to small companies that have ten times the time cost of debt of their buyers or, in some cases, no real access to any form of financing.

Why do we not see this directive as an opportunity for shifting away from 90+ payment terms towards more sophisticated forms of SCF?

Unintended consequences

However, we would be myopic not to point out that this directive might also end up exacerbating existing conflicts between buyers and suppliers in the food industry. It’s not difficult to imagine power unbalanced buyer-supplier relationships in which an extra discount is imposed on small(er) suppliers to compensate for the reduction in payment terms. Or in which the directive is simply ignored, with suppliers not able to promote its enforcement.

As the SCF Community, we would like to understand the expected consequences for buyers and suppliers. Please share your views via this 2-minute survey.

If you wish to be part of a more in-depth discussion, please join the consortium of buyers and suppliers we have recently set up to work on understanding the implication of UTP for their own supply chain and SCF programmes overall. The consortium met for the first time in mid-March and shared first insights and views on the upcoming laws, including strategies and indications on what is going to happen to existing SCF programmes.

Luca Mattia Gelsomino

Assistant Professor at University of Groningen.