Bank deal gives suppliers better rates on borrowing against M&S invoices
Marks & Spencer is working with high street banks HSBC and Royal Bank of Scotland (RBS) to open up vital lines of credit for its suppliers after extending its settlement terms.
The UK’s largest clothing retailer has used its clout and established relationships with the banks to negotiate preferential lending rates for its 860 general merchandise suppliers who want to borrow against their M&S sales invoices to ease their cash flow. The practice is known as factoring or invoice discounting. It is the first major initiative at M&S since the arrival of new chief executive Marc Bolland from supermarket chain Morrisons in May.
The bank deal was negotiated at the same time that supplier settlement terms were extended from 30 days to 60 days for suppliers that work with the retailer on a freight-on-board (FOB) basis. FOB refers to suppliers who relinquish responsibility for stock when it leaves the factory. In these circumstances the retailer arranges for transportation to the UK.
Landed or full-service vendors (FSV), those which manufacture stock and deliver it to the UK for the retailer, have had payment terms increased from four to five weeks.
The payment term changes will have a negative impact on suppliers’ cash flow at a time when there is a general lack of trade credit insurance availability on supplier orders. However, M&S’s Vendor Financing Scheme with the banks will offset this when it comes into effect on new orders on September 1. It follows a limited trial of the scheme last year.
The deal with HSBC and RBS will offer suppliers lower rates than the standard rates banks normally attach to the factoring practice. Indicative rates will be 0.95% above LIBOR (the interest rate at which banks borrow money from each other). Suppliers said the rates were competitive compared with standard rates.
The decision to extend the settlement terms will also bring in millions of pounds in liquidity for M&S.
Banks have been under pressure to be seen to be injecting liquidity into the economy under the new Government.
M&S is the first retailer since the recession to work in conjunction with banks towards offering better lending terms. Grocers including Tesco and Sainsbury’s have implemented similar schemes but these were all experimented with prior to the downturn.
A source said: “M&S has changed terms, offering an innovative solution which allows [suppliers] to borrow more at better rates.”
Another source said: “Working capital is incredibly difficult for businesses to get and although we run invoice discounting schemes with our own banks, there are lots of caveats. This way the retailer uses its power and its security and rates are lower. It is a good way to support a supply chain.”
While some suppliers were concerned at the extra cost and pressure on cash flow necessitated the extended terms would bring, many welcomed the move. “If we are faced with a change in terms, even with notice, if we are doing £1m a month with someone we will need an extra £1m of facilities from the bank. They won’t give it to us. For M&S to work with the bank is a good thing,” one supplier said.
It is understood Marks & Spencer’s supply chain is split 55:45 by value across FOB suppliers and FSV suppliers. The new Vendor Financing Scheme will be open to all suppliers.
An M&S spokeswoman said: “Following a full audit of our general merchandise payment terms, we are extending these terms to bring us in line with industry standards, and aligning them so we can have greater parity across our supply base. We are also extending our current Vendor Financing Scheme.
“The changes will be applied to new orders raised with our FOB and FSV suppliers on or after September 1, 2010 and to existing FSV orders on or after December 1, 2010.”