Trade Finance (SCF)) for Freight Invoices Threatened

Shippers’ who utilize their freight payment firms for terms extension on their freight invoices may be in for a not-so-good surprise brought to them by the accounting standards experts.

For many years, certain providers in the freight payment industry have made significant revenue by using shippers’ credit to pay carriers quickly. The freight pay firm charges a rich discount fee to the carrier and keeps all the revenue for themselves while giving the shipper an extension of terms to a paltry 45 days (on average).

This practice goes by many names: trade finance, supply chain finance, reverse factoring, rapid payment and terms extension.

A key piece of this practice which makes it attractive to shippers is that it involves an extension of payment terms on their accounts payable for freight. It is, in essence, free money without being treated as debt. Rather, the shippers’ rely upon some aggressive accounting policy to continue to treat this as Accounts Payable.

The aggressiveness of this posture has been an open secret in the supply chain finance world for many years. However, recent excesses by users of Supply Chain Finance are prompting the accounting standards boards to examine the treatment of these arrangements and shippers’ may be in for a big surprise.

The unfortunate reality is that this is debt. The shipper’s credit by the freight payment firm (usually a bank) to support the early payment to carrier. This is “invisible” debt to analysts and the accounting rule makers are finally looking at it.

Financing That Masks ‘Hidden Debt’ Stokes

Posted by Ross Harris at 14:39