Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell has released a position paper outlining the key preliminary findings of the Supply Chain Financing Review.
The ombudsman found that while supply chain finance is a legitimate and effective tool that can be used to free up cash flow for small and family businesses, too many big businesses have extended payment times and then offered supply chain finance.
Ms Carnell opined that this practice is “totally unacceptable”.
She took aim at the definition of a small business, explaining that this is where the problem begins.
“A key finding in our position paper is the definition of a small business continues to be a major blockage, and a unified approach would be beneficial to small businesses,” Ms Carnell said.
“There are too many small businesses that have to wait too long to get paid. This is in part because the definition of small business is wide open to manipulation under the Supplier Payment Code.”
However, even putting aside the issue of manipulation, she noted that the Supplier Payment Code is voluntary, meaning there is no compliance monitoring.
“It’s actually unenforceable.”
As a result, the ombudsman has made a draft recommendation that the Payment Times Reporting Framework replace the Supplier Payment Code, with that framework being administered and enforced by an appropriately funded, empowered and proactive entity.
The ombudsman has also recommended that the minimum standard for all supplier payments, regardless of supplier size, should be 30 days.
“The fact is that all businesses, regardless of their size, should be paid in 30 days, and supply chain finance should be available to those small businesses that want to be paid faster,” she said.
“Rates should be set across markets and not through the use of technology aimed at targeting and squeezing small business suppliers, including those already in distress.”
Acknowledging that the question of regulation remains live, her office has also asked for further consideration to be given to whether supply chain finance should be a regulated financial product.
The ASBFEO is now seeking specific and general comments on the draft recommendations by 28 February.
Full list of recommendations
1. Consistent small business definition. The small business definition adopted across government should be either to simply define small business as not including, say, the top 100 companies or “(a) a small business has fewer than 100 employees or (b) less than 100 employees, with satisfaction of either (a) or (b) being sufficient to qualify as a small business”.
2. Enforceable payment times. The Supplier Payment Code should be replaced by the Commonwealth Government’s Payment Times Reporting Framework with that framework being administered and enforced by an appropriately funded, empowered and proactive entity.
3. Thirty-day payment standard. The minimum standard for all supplier payments (regardless of supplier size) should be 30 days.
4. SCF as a real choice. SCF should be available to small business to reduce payment times from 30 days to better.
5. Appropriate coverage by accounting standards. The accounting standards need to provide greater clarity and properly cover SCF to ensure that accounts cannot be manipulated, particularly to mask cash-flow issues and insolvency.
6. Further review from competition perspective. The ACCC should review SCF provider activity from an Australian competition law viewpoint, including how data is applied through using artificial intelligence and algorithms.
7. Further review from regulated financial product perspective. Treasury and ASIC should review whether SCF should be a regulated financial product with coverage of rate setting.
Telstra and Rio Tinto commit to faster payment times
Earlier this week, both Telstra and Rio Tinto committed to 20-day payment terms for SMEs, just days after it was reported that both companies were turning to technology to push suppliers to shave their invoices in exchange for prompt payments.
Last week, Telstra and Rio Tinto found themselves in hot water when The Australian revealed that the telco and mining giant were using artificial intelligence and big-data mining to manipulate suppliers.
At the time, the ASBFEO responded with a warning, telling big businesses that the practice of using supply chain finance products that mine big data to manipulate small businesses is unacceptable.
“It’s clearly not OK for big businesses to use their dominant position and access to technology to further squeeze small business margins,” Mr Carnell said at the time.
The ASBFEO is expected to release the final findings of its review into supply chain financing before the end of April.