Large companies sign up to allow suppliers to take advantage of cheaper bank lending

The expanded Supply Chain Finance (SCF) scheme promises easier cash flow to suppliers of companies including ASDA, Siemens, Tesco and Marks and Spencer. By allowing suppliers immediate access to invoiced funds that have been approved for payment, SCF could be worth as much as £20 billion to small businesses, the Government said.

Following a meeting last week with industry figures, Prime Minister David Cameron said that the Government also planned to offer SCF to its own suppliers where possible.

"This Government is determined to back all those businesses who aspire to get ahead and take on more people," he said. "In the current climate, viable businesses can struggle to get the finance they need to grow - this scheme will not only help them secure finance and support cash flow, but will help secure supply chains for some of our biggest companies and protect thousands of jobs. It can be a win-win, with large companies and small suppliers both benefiting from this innovative scheme."

SCF has already been successfully implemented by companies including Rolls Royce and Vodafone. Under the scheme, banks are notified by participating large companies once an invoice has been approved for payment. The bank can then offer up to 100% of the invoiced funds as an immediate advance to the supplier at a low interest rate based on the larger company's credit rating, knowing that the invoice will ultimately be paid by the large company.

The first UK Government SCF scheme, announced by the Prime Minister, is to benefit around 4,500 community pharmacies in England. It will make up to £800 million of new credit available to those businesses by allowing them to access the amount they are owed by the NHS Business Service Authority (NHSBSA) far in advance of the eight weeks it can typically take before invoices are processed in full.

Commercial law expert Ruth Andrew of Pinsent Masons, the law firm behind Out-Law.com, said that the scheme was "a good idea" that would be welcomed by struggling suppliers.

"Along with the proposed implementation of the new late payment legislation, this new initiative shows encouraging signs of support for the economy and the smaller business and may help alleviate short-term cash flow problems," she said.

The Government is currently consulting (30-page / 191KB PDF) on how best to implement the EU's Late Payments Directive, due to be transposed into national legislation by March next year. The Directive requires public authorities to pay their suppliers within 30 calendar days of receipt of an undisputed invoice, while payment terms for business to business payments as fixed in the contract cannot exceed 60 days unless otherwise expressly agreed. The Directive also sets minimum levels of compensation for late payments.

The national chairman of the Federation of Small Businesses (FSB), John Walker, agreed that the scheme could help to tackle the growing problem of late payments impacting on suppliers.

"Nearly three quarters of small businesses report that they have been paid late in the past year, placing a huge strain on cash flow and meaning they struggle to realise ambitions to grow," he said. "The FSB welcomes the Government's commitment to helping small firms secure finance. We encourage large companies to support and implement the scheme, so that it can play its part in improving confidence and encouraging growth throughout the supply chain."

SCF is the latest in a number of Government initiatives aimed at making it easier for small businesses to access credit. These include the Funding for Lending scheme, which encourages banks to boost lending, and the Enterprise Finance Guarantee loan guarantee programme.