he focus on David Cameron’s role in lobbying for Greensill Capital’s involvement in NHS payment systems has obscured a less glamorous question: how did a firm involved in such a mundane part of the financial services ecology became so significant, so quickly? Greensill Capital, which entered administration last month, provided payment services including “factoring” and “supply chain financing”. Although the company represented itself as part of the “fintech” revolution, these services were not in themselves particularly noteworthy or innovative. To understand the growing appeal of Greensill and other providers, we therefore need a wider lens. Supply chain financing (or “reverse-factoring”) solves a common payment problem. Firms traditionally supply goods or services to a customer and issue an invoice for payment. While the supplier might prefer the invoice to be paid immediately, the customer might want to delay payment. In situations where the customer is large and influential, they might insist the supplier wait two or more months. With reverse factoring, a financial institution offers to step in to pay the supplier sooner on the customer’s behalf, minus a small discount which they take as their fee, or part of their fee. The customer then settles with the financial institution at an agreed later date, often four or five months later. On paper, everyone wins and there are no risks. But textbook definitions don’t always apply neatly to the real world. In recent years, the appeal of supply-chain finance has included the possibilities it provides for what’s euphemistically called creative accounting. Creative accounting has blossomed under the fair-value revolution – a change in the accounting rules towards a more market-based outlook. This essentially means the business of doing one’s accounts has pivoted towards an evaluation of future cashflows rather than a valuation of past transactions. Many assets are no longer valued on the basis of the price paid for them, but on their current market values or even modelled estimates of the future cashflows they will generate. This also applies to some contracts, where profits are booked on the basis of future expectations. This approach to accounting creates the scope for discretion, subjectivity and speculation. It has arguably made it easier for firms to “recognise” profits than to generate the actual cashflows that support them. And it is here that supply chain financing can be misused. The gap between cashflow and profit was a defining feature of what happened to Carillion, the outsourcing company that folded in 2018. Carillion used reverse factoring to hold on to its cash for longer and thus report higher net operating cashflows. This accounting trick allowed the company to report a higher “cash conversion” rate (the amount of profit realised as cash), which was used to calculate a portion of executive director pay. Carillion’s accounting treatment of its supply chain financing also allowed the company to disguise its debt. Carillion’s obligations to banks in the form of overdrafts and loans stood at £148m in 2016, but its supply chain financing liability was estimated to be £498m. This partly helped Carillion look much healthier than it was. Carillion, like many large firms, became a kind of portal, capable of moving income and costs around in time and space based on projections of its future economic fortunes. Supply-chain financing allowed it to produce operating cashflow figures that gave those profit figures some credibility. Many other firms may be exploiting this loophole, in a market estimated to be $3.5tn (£2.5tn). Fast forward to Greensill, which was not involved with Carillion but had factoring arrangements with other large firms. Whereas reverse factoring offers early payments to a customer’s suppliers, straight “factoring” is when a business sells its invoices or receivables to a third party at a discount. As Greensill pushed for growth, the collateral underlying the transactions with some of those companies appeared to be speculative. As investigative work has shown, Greensill did not just lend against the security of invoices for transactions that had already occurred, it lent against the “prospective receivables” the company might generate in the future. In other words, it would lend against transactions that had not occurred and may never occur with companies that had never done business with its clients. (Representatives of Greensill have declined to comment.) That is the unsettling context within which the Cameron story should be understood. Greensill was carrying a lot of risk going into the negotiations over payment systems in the NHS. That deal, if the company could have secured it, would have provided Greensill with an extremely large, near-riskless income stream because of the state’s creditworthiness. But it may also have created sizeable too-big-to-fail problems if the company became an intrinsic part of the public sector payment machinery. Would the state need to support or bail out Greensill if its risky private ventures produced solvency problems that threatened to disrupt wage payments to nurses and doctors? Although the company was not given this deal, it did manage to make some inroads via its Earnd app and also provided supply-chain financing to pharmacies. It remains to be seen how far its involvement in public provision has stretched. Supply chain finance provides many benefits, but it can be misused when it operates as a temporal fix for a rather surreal, holographic form of capitalism. Greensill’s model was never going to be sustainable in the long term because at some point debts need to be settled. Yet that was hardly the point: it was sustainable enough for long enough for the owner of Greensill Capital – and perhaps some of its clients – to become richer. It also raises questions about the relationship between the state and private providers, and the blurring of that boundary. It has become increasingly unclear whether such firms really do help the state with their service delivery problems, or whether the state helps them with their risk and profitability problems. Adam Leaver is professor of accounting and society at the University of Sheffield