The global construction industry is painfully vulnerable to restricted cashflow, but now a fin tech company is developing a way to pay everybody on time.
It’s no secret that, bedevilled by low margins and extreme supply-chain fragmentation, construction struggles with cashflow.
In a recent survey of construction firms, 84% reported that they had problems with it, and "black swan" events like the collapse of Carillion can affect as many as 30,000 subcontractors.
No wonder, then, that nearly 3,000 construction firms went bust in the year to September 2018.
MPs investigating Carillion slammed its use of what they called "accounting tricks" to hide its financial ill health, but now one of those tricks, called "reverse factoring" or supply chain finance (SCF), is being touted as a way of unleashing billions into the cash-starved supply chain.Â
It’s promoted by a man who used to be the UK government’s chief commercial officer, Bill Crothers, who says the clever use of financial IT systems, including artificial intelligence, can de-risk, automate and simplify a process that used to be slow and choked with red tape.
Crothers, who set up the Crown Commercial Services agency, is now head of sales for Greensill Capital, a "fintech" company set up to offer SCF.
Instead of being a mark of shame, SCF, done right, can loosen liquidity in construction without having to restructure the entire sector, he says.
SCF is a simple concept. When a supplier submits an invoice to a client, that invoice is paid by a third-party financier, who gets paid by the client later. The supplier pays a fee to be paid early, and the client pays a fee to pay late, allowing both to optimise their working capital.
Carillion was accused by MPs and credit ratings agencies of hiding the amount owed to suppliers under its SCF system, but Crothers believes there’s no need to see it as a bad thing.
"There’s more than $3.5 trillion locked up in accounts receivable around the world. If some of that could be made available then there would be a significant release of capital into business," he told Oracle’s recent Future of Projects conference in London.
He says demand for SCF is huge. To demonstrate how huge, he points out that Greensill is currently the world’s second largest supplier of SCF after Citibank, but has less than 0.5% of global market share. Nevertheless, it has grown from nought to a business valued at around $1.6bn in less than eight years.
SCF has been around for about 30 years, but has been hamstrung by clunky technology and a hidebound approach to the legal framework. Crothers says: "SCF 1.0 was a manual, paper-based labour-intensive process largely provided by big banks, and it tended to address only the top of the supply chain. So, Citi used to supply SCF to Vodaphone, but only its biggest 50 suppliers; we’ve been supplying Vodaphone for 18 months and we have 12,000 on our books."
This is possible, Crothers says, by using what he calls SCF 2.0: a re-engineering of the whole financial process.
The first element is to access capital from a wide variety of sources. Greensill gets its money by selling bonds to some 109 buyers around the world, including banks, asset managers and pension funds. This creates competition and secures Greensill against credit shortages. It also allows access to "almost infinite capital" – Greensill issues on average 40 bonds every working day, making it the largest non-governmental issuer of bonds in the European market. So far, it has raised more than $60bn in funds this way.
The second element is a stripped-down legal framework. Banks used to make clients sign "six-inches" of documentation before beginning a relationship. Greensill uses what Crothers calls an "iTunes pop-up" – a single page of T&Cs.
The third element is technology. Much of Greensill’s business runs on Oracle’s Textura payments system, which is cloud-based and blockchain compliant – both fundamental requirements.
All this makes it possible for Greensill to enter a business relationship in less than 90 seconds.
"The supplier gets a message from the client asking, ‘do you want to sign up to the programme?’ If the supplier says ‘yes’, they sign the iTunes legal popup and they are connected to our ERP system. When an invoice is approved by the client, a message appears on the supplier’s screen to ask if it wants to be paid early – there’s a slider that allows them to choose tomorrow, in a week, in two weeks, and states the fee. They can also put it onto autopilot, so it’s always paid with the same delay."
This allows SCF to be accessed by companies that couldn’t have before, so it reaches deeper into the nooks and crannies of the supply base. It also allows small companies to access capital at only a little more than the interest rate commanded by triple A corporations – which might be as much as a four-percentage-point spread.
As a result, Greensill has now entered into a commercial relationship with about 1.7 million suppliers in 60 countries.
The benefits for construction, and its clients, of having a financially resilient supply chain is obvious. But Greensill is planning to take the process even further with big data, artificial intelligence and machine learning. Crothers calls it "SCF 3.0".
"The idea is to look at payment history, invoice behaviour to recognise patterns, predict payments and use that to infer credit and make decisions and spot fraud," he says. "Big data allows us to do this using deep statistical methods that are not a simple extrapolation from past behaviour to future behaviour."
Greensill is working on this with Oracle Textura and others in the financial and construction world, including Turner Construction in the US.
"We want to get money to 88% of the supply chain," Crothers said, adding that one recent pilot released $100m into the system after thousands of subcontractors signed up, all through a series of single clicks.
Image: Carillion’s collapse may have left as many as 30,000 firms out of pocket (Carillion)