ASBFEO recommendations may see ‘catch-22’: ScotPac

The review, which was launched in October 2019, examines the impact that supply chain finance has had on the small business and family enterprise sector. A final report is expected by the end of March 2020.

According to the preliminary findings, there is a common practice of bigger businesses “abusing” the system by extending their invoice payment terms — at times up to 90 days — and then offering small-business suppliers payment within 30 days via supply chain financing, in exchange for a discount off the total invoice.

The launch of the review has caused larger businesses to move away from their early payment supply chain finance programs, according to SME lender Scottish Pacific.

However, Scottish Pacific senior executive Wayne Smith has warned that small businesses may face “unintended consequences” in the immediate aftermath of efforts to shut down supply chain finance programs.

“We applaud the efforts of 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,” he 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.”

According to Mr Smith, some small businesses may have “developed a dependency” on the cash flow rhythm of supply chain finance programs, and now may be facing a “less certain cash cycle”.

“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,” he outlined.

However, Mr Smith echoed the sentiment of the ombudsman by suggesting that early payment programs should operate to help SMEs, not to squeeze them into taking a pay cut in exchange for prompt payment. 

“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 continued.

“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.”

Scottish Pacific highlighted that it had jointly launched an “industry first” guide for small business funding options, the Business Funding Guide, with the ASBFEO last year.

The first edition of the guide was launched in July 2019 to help brokers, accountants, bookkeepers and financial advisers understand the plethora of SME financing options available, and “tackle the access to funding crisis” being faced by SMEs.

In the absence of supply chain finance, Mr Smith noted that debtor finance is one funding option that can help those businesses coming off cancelled early payment programs.

[Related: ASBFEO calls for 30-day payment terms for SMEs]