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linden toll

What does it take to get small businesses paid on time?

linden toll
Linden Toll 4 minute read

While legislation may be needed to standardise payment times and practices for SMEs, brokers are the key to ensuring SMEs are able to manage their cash flow, says the CEO of Apricity Finance.

The inquiry by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell into supply chain finance has brought into sharp focus an issue that has been affecting SMEs and brokers for some time. And that is how small businesses are being unfairly treated by their big customers. 

It is always exciting for any small business when they win a contract with a large company. But this excitement quickly wanes as they discover that unfair payment terms make it difficult to keep paying staff and deliver on their obligations. Thankfully Ms Carnell and her compatriots want to change this. 

The interim report released in early February found that Australian and multinational companies were increasingly delaying or extending payments to their SME suppliers from 30 days to 45, 90 or longer. Some large companies were also then pushing reverse factoring models, where they pay invoices faster, but deduct a fee from the monies paid.

One of the issues with this practice is that some businesses were not allowing their suppliers to use invoice finance facilities other than the one they white label. The other problem was that the large companies were using the extended payment terms of invoices to add extra revenue to their own bottom line. Revenue that is being deducted directly from the profits of their suppliers. When you know how much work goes into winning, maintaining and funding these contracts, the strain this is placing on the SME is staggering. 

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Wind of the inquiry led to widespread condemnation in the media. And a number of large corporates quickly distanced themselves from their reverse factoring models. The report and ongoing calls for action from ASBFEO Ombudsman Kate Carnell as well as Michaelia Cash, have led to the federal government opening consultation on the draft Payment Times Reporting Framework.  

The legislation is proposed to take effect from 1 January 2021 and would require large businesses with an annual turnover of more than $100 million, to publish information on their SME payment times and practices (including their use of reverse factoring models). The information would be made available to the public and give SMEs some insight into how working with a large client might impact their business.  

Certainly, late payment of invoices can be blamed for holding back the growth and productivity of many SMEs. Ahead of any legislation, it continues to fall to brokers and business owners to find finance options to help steady cash flow. 

Our view is that getting working capital back into a business sooner is key to long-term business success. It means businesses can take advantage of new opportunities and hence, continue to grow. When it is by choice, businesses are often happy to offset the cost of a facility against the value of receiving funds when they need them.  

However, using a finance facility of any type should always be the decision of the business taking it on (not something that is pushed on to them in order to get paid). 

Having an “at call” finance facility can mean the business is able to maintain stability through changing market and economic conditions, as well as successfully taking a seat at the table with larger businesses. The role of brokers and business advisers is to evaluate the current situation and find the right options for their clients. 

The work of ASBFEO Ombudsman Kate Carnell and the proposed legislation is certainly a huge step forward, and one that could change the SME sector significantly – for the better.  As Ms Carnell states in the report “$115 billion worth of payments to small business are late and this stops $7 billion of working capital being available to small businesses every year.” 

The ability to realise working capital on time, consistently has the power to shake up the SME landscape as well as the broader economy.

Consultation on the draft Payment Times Reporting Framework is open until 6 March 2020.

What does it take to get small businesses paid on time?
linden toll
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linden toll
Linden Toll

Linden Toll

Founder of Apricity Finance, Linden has more than 25 years working across the finance industry. His experience covers distribution, capital raising, product development and investment reviews, responsible manager and board level roles. He has wide networks and significant experience in marketing at retail, intermediary and institutional levels.

Linden is a board member and responsible manager for a number of funds management and other financial services firms.

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