A small-business financier has warned that Aussie small businesses might face unintended consequences from the efforts to shut unfair supply chain finance programs.
Scottish Pacific opined on Tuesday that while recent media attention and pressure from the office of the small business ombudsman have encouraged some of Australia’s largest companies to end their early payment supply chain finance programs, this could also have unintended consequences.
The financier’s senior executive, Wayne Smith, said the ombudsman was rightly trying to ensure SMEs are not put at a disadvantage by big businesses, but questioned how this would limit their funding options.
“We applaud the efforts of the ASBFEO to protect the interests of small-business owners, and to encourage large corporations to end programs that stretch out payment times for SMEs in order for them to secure early payment discounts,” Mr Smith said.
“The catch-22 in shutting down these programs is that, while in the long term this may help the SME sector, in the short term essentially SMEs have had a funding option taken away from them.”
He explained that many small-business suppliers have developed a dependency on the operating rhythm provided by these programs, and cautioned that in the absence of a comprehensive phase-out period, their businesses could potentially be forced into a less certain cash cycle.
SME Growth Index research showed twice as many SMEs are reporting significantly worse cash flow as the previous year, and more than a quarter of small businesses said their cash-flow problems make it difficult to meet their tax payments on time.
“Cash flow is already a huge issue for Australia’s SME sector, so small businesses coming off these early payment schemes will need to find new ways to ensure they have adequate cash flow,” Mr Smith cautioned.
He opined that early payment programs should operate to help SMEs, not to squeeze them into taking a pay cut in exchange for prompt payment. Done correctly, he added, they provide an effective way for SMEs to access low-cost funding without providing property security.
“These programs should be designed to be a ‘win-win’ for buyers and suppliers, not as a means to push out supplier payment terms from existing supplier arrangements,” Mr Smith said.
“The danger is when larger corporations are able to use these programs to their benefit to extend payment terms, with a negative impact on ‘the little guy’. That essentially puts a gun to their head to choose between cash flow at a discount or extended periods without cash flow.”
Late last week, independent research conducted by market analysts East & Partners on behalf of Scottish Pacific found a huge disparity in how long it takes businesses in the $1 million to $20 million revenue bracket to get money in the door.
Having surveyed over 1,200 SME owners or senior finance staff, across a selection of industries and states, Scottish Pacific revealed that their range of payment times (debtor days) varied from seven days to an extremely challenging 134 days.
Ombudsman Kate Carnell said in February that if big businesses continue to flout reasonable payment terms, she will have no choice but to recommend federal legislation requiring all businesses to be paid in 30 days.
This year, major businesses including Telstra and Rio Tinto have committed to shorter (20-day) payment times.
Maja Garaca Djurdjevic is the editor of My Business.
Maja has an extensive career as a journalist across finance, business and market intelligence. Prior to joining Momentum Media, Maja spent several years unravelling social, political and economic intricacies in Eastern Europe.
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