Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell has called for federal legislation requiring small businesses to be paid in 30 days, as the number of large businesses pushing out payment times to their small-business suppliers spikes.
This is a key recommendation made in the ASBFEO’s final report into supply chain financing, which calls our several household-name businesses for engaging in poor payment practices. Among them are MYER, David Jones, Just Group, Sussan Group, Carlton United Brewery and CIMIC.
“Large businesses extending or, in some cases, suspending payments to small businesses are on notice that this behaviour is unacceptable,” Ms Carnell said.
“There’s no denying businesses of all shapes and sizes are enduring extraordinary challenges as a result of the coronavirus crisis, but small businesses are being hit hardest.”
With many small businesses forced to close their doors, Ms Carnell predicted that a lot may not survive the coming months even with significant support from the government.
“That’s why it is more important than ever to ensure small businesses are paid on time.
“We know that if small businesses are paid on time, the whole economy benefits. On the flip side, a lack of cash flow is the leading cause of insolvency.”
She believes that legislation requiring SMEs to be paid in 30 days is the only way to drive meaningful cultural change in business payment performance across the economy.
“If Australia were to go down this path, it would not be alone. Just recently, legislation was tabled in the UK that stipulates a uniform 30-day statutory limit for payment of invoices and provides for enforcement of financial penalties for late payments.”
‘Code is unenforceable’
The ASBFEO’s review has revealed the voluntary Supplier Payment Code is not effective and is “actually unenforceable”, given that there is no compliance monitoring.
“While we support the Payment Times Reporting Framework as a useful tool, it’s unlikely to result in the systemic change that is needed,” Ms Carnell said.
“When used appropriately, supply chain finance is a legitimate and effective product that can be used to free-up cash flow for small and family businesses. In fact, it may be particularly useful to small businesses that need to be paid faster as they navigate their way through the COVID-19 crisis.”
Average payment times double
And research commissioned by SME funder Scottish Pacific has revealed that the average SME is waiting 56 days to be paid — almost double what ASBFEO is seeking big businesses to commit to.
Scottish Pacific CEO Peter Langham said while the overall SME average is 56 days, the strain is more marked at the smaller end of the sector, with businesses of $1 million to $10 million revenue waiting on average 66 debtor days.
With the COVID-19 pandemic occurring after the survey was taken, the impact may be dragging these payment times out even longer.
“Money that could be used to expand revenue and invest in growth is being tied up for too long, as SMEs struggle to be paid within a reasonable time frame,” Mr Langham said.
“This is a significant burden to bear and reinforces the importance of reducing payment times, in particular for SMEs struggling to source new funding or to refinance their existing borrowings.
“There is a great disparity, and we see as businesses become larger, they get paid more quickly.”