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The extended impact of extended Payment Terms

- February 27, 2020 3 MIN READ

Australia’s Small Business and Family Enterprise Ombudsman, Kate Carnell, has once again unleashed a shot across the bow of the big companies that continue to subject small businesses to extended payment terms,” writes Bronwyn Reid.

Ms Carnell said that the practice of imposing long payment terms on small businesses, and then offering them discounts for early payment, is “totally unacceptable”.

I wholeheartedly agree with her, and have written extensively on the impact of big companies imposing extended payment terms on their small suppliers, up to 120 days in some cases. On top of that, Australia holds the world record for late payment of invoices (that’s one world record that we shouldn’t be proud of). These practices starve SMEs of cash flow – the number one cause of small business failure.

THE IMPACT OF LATER PAYMENTS SPREADS.

But late payments don’t just harm the business that is not getting paid. Because one business doesn’t have cash, that business will most probably extend payment times to their own suppliers, or not hire an additional person, or not invest in new equipment. We have known these flow-on effects on the wider community are real, and there is empirical research to quantify it.

One regional area that has been dramatically affected by extended payment terms is the coal-mining area around Central Queensland. When the mining industry went into decline in 2013, several large mining houses imposed unilateral payment terms of up to 90 days on their suppliers. This was done to shore up their own cash reserves; effectively asking their suppliers (including small and micro businesses) to become their bankers.

On top of the loss of business as mining companies slashed their overall spend, this was a fatal blow to many Small (and large) Businesses. Many did not survive. Now, in 2020, the fortunes of the coal industry have reversed. Prices have recovered, production is up, and development projects are in full swing, but in some cases, the extended payment terms remain.

To quantify the region-wide impact of these unilateral extensions of payment terms, a Queensland-based industry group commissioned a research report. The results were stunning. The report concluded that:

“If payment terns across the industry were returned to a “normal” 30 days, there would be an extra 250 jobs across the region.”

Over five years, this would generate:

  • An additional 380 jobs.
  • $150 million in wages.
  • $250 million in Gross Regional Product.

WOULD YOU BE MY BANKER?

As I mentioned, extended payment terms starve a Small Business of cash flow, so they must find it elsewhere, and elsewhere comes at a cost:

“Invoice financing is typically in the range of 6½ % to 8%, trade finance is typically 7% to 8 ½%, and overdraft facilities are typically 7 ½% to 9%”.

I’m prepared to stick my neck out here and suggest that finance provided to the large companies would not be this expensive, so the finance risk has been transferred from the large company to the small.

A NATIONAL RESPONSE?

Both Federal and State Governments are continually searching for and experimenting with policies to support small business.

Well here is a sure-fire way for Governments to boost small business – enforceable 30 day payment terms for small business.

Ms Carnell has included this in a list of 7 recommendations to Government. The payment terms would be enforced by an “appropriately funded, empowered and proactive entity”.

There has been far too much delay and discussion about this topic. The Federal Government already pays some small business contracts in 20 days. Now it’s time to require our biggest companies to do the same. Small Business must no longer be used as a source of credit by their big customers, and economic growth must no longer be stifled by the crippling effects of extended payment terms.

 

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