Small Business Commissioner David Eaton warns that the traditional technique of stretching working capital by delaying payments to creditors presents reputational risks, and boards of organisations need to prioritise creating a responsible payment culture.

Late payments to small businesses from their larger business customers have long been one of the sharpest thorns in the side of small operators in Australia and internationally. As our nation works towards economic recovery from the COVID-19 pandemic, the impacts of late payments must be urgently addressed.

How big is the problem?

To give some perspective on this problem, a 2017 report by Plum Consulting found that nearly $50 billion is paid late to Australian SMEs every year, while the Scottish Pacific SME Growth Index report noted that late payments accounted for a 43 per cent downturn in a small business’s cash flow.

The 2017 Payment Times and Practices Inquiry by the Australian Small Business and Family Enterprise Ombudsmen reported that Australian organisations lagged well behind their international counterparts, paying their suppliers on average 26 days after the due date — 20 days later than their peers in the US and UK.

In my experience, the problem is due to the imbalance of bargaining power; and in many cases it is under reported, as small business owners fear retribution through their removal from procurement panels.

The impact of late payments

Late payments expose businesses to increased financial risk. The UK Department for Business, Energy & Industrial Strategy found that up to 30 per cent of SMEs needed to access bank overdrafts to cover cash flow shortfalls due to late payment. Most significantly, late payments are named as the single biggest cause of business failure for SMEs, who are often ill equipped to manage payment delays due to their limited cash reserves.

The non-financial effects of late payments are also extensive. New research published by Barclays Bank showed that 39 per cent of small to medium sized business owners say their mental wellbeing has suffered as a result of late payments. A further 25 per cent report reduced work-life balance due to inability to take leave, whilst others noted a worsening of personal relationships caused by stress and anxieties created by late payments.

Economic outcomes

Aside from the impact on individual businesses and their owners, late payments affect our overall economy. When SMEs experience cash flow constraints via consistent late payments, they are less able to innovate, expand and employ. In fact, as the UK experience found, it may even lead to redundancies.

What is the solution?

While the launch of the Federal Government’s Payment Times Reports Register late last year is designed to provide transparency around big to small business payment times, this public record targets organisations with an annual turnover over $100 million. It therefore only reports on the payment policies of 6,000 of Australia’s biggest organisations.

To effect real change, it is essential that all of Australia’s 2.4 million businesses embrace their obligation to pay business-to-business invoices within 30 days.

I propose that all businesses:

  1. Implement a formal and public policy to pay small businesses within 30 days or less from the date of correct invoice.
  2. Cease the practice of requesting on-time payment discounts or using late payments to bolster their own working capital.
  3. Implement measurement and reporting of their payment times, in order to improve performance.
  4. Adopt the digital tools now available to expedite and streamline payment processing.

On the last point — COVID-19 has accelerated digital adoption in many areas of life, and payments are no exception. The introduction of eInvoicing (the digital exchange of invoices between accounting systems rather than entities) is an important step forward to streamline and expedite payments between businesses. However, this is just the mechanism to pay invoices more efficiently.

What a difference it would make to small businesses and our national economy, if we committed to an on-time payment policy such as those adopted by Australian governments. Many jurisdictions have committed to 20 day payment terms and 5 day terms where eInvoicing capability exists.

Long term economic growth over short term self interest

Often, late payments do not occur for legitimate or unavoidable commercial reasons. Rather, large businesses choose to use small businesses as involuntary creditors, by delaying payments.

Paying suppliers promptly, particularly small businesses, should be part of every organisation’s Environmental, Social and Governance standards. It is, quite frankly, unethical as well as unsustainable to knowingly endanger the existence of smaller enterprises by stretching payment timeframes so as to prop up your own financial position. It is the type of behaviour that not only threatens the reputation of corporations, but also that of their Boards.

I urge corporate Australia to demonstrate that we don’t need further regulation in order to do the right thing for our small business sector and our economy. Australia can lead the world in creating a responsible payment culture and consequently remove a significant drag on Australia’s economic future.

First published by the Australian Institute of Company Directors, September 2022

SBDC news
22 September 2022