The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) launched an inquiry into late payment times early this year. This was done to investigate claims that small businesses were being paid increasingly late by larger clients, and being subjected to unfair payment terms in unequal business relationships. While the ASBFEO report’s preliminary findings were already quite alarming, the real scale and impacts of the problem are only now being understood.

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Initial results found, mostly according to anecdotal evidence, that business owners experienced difficulty in maintaining and growing their businesses, and managing their own mental health and stress levels as a result of late and unreliable payment times. More concrete findings now show just how badly this issue has disadvantaged small businesses, and what that means for Australia’s economy.

Australia is dead last on payment times

According to the ASBFEO, Australian businesses are, on average, paid 26.4 days late in Australia, compared to 5.85 days late in the UK, and 6.5 days early in Japan. Of the countries analysed, Australia comes in dead last. Worse, a few Australian businesses force small businesses to wait 120 days after invoicing to receive payment. This makes the country one of the most financially uncertain places for small businesses to operate. It also creates an extremely unequal relationship between small businesses and their big business clients.

Paying late isn’t just an issue of laziness or insolvency on the part of the delinquent big-business clients. By withholding payment, offenders effectively use the victim as an interest-free short-term lender. Large multinational businesses that work with a large number of smaller businesses can “borrow” large sums in aggregate by maintaining a balance with their various partners, and only paying each one off as a new debt is created to take its place. Effectively, this gives these businesses access to more capital to finance their own growth and stability by withholding that same capital from their smaller partners.

The cost for SMEs

IntegraPay’s 2017 State of Pay Index showed that approximately one third of small businesses owners spend 8 or more hours per week chasing down and collecting late payments. That means entrepreneurs, who already face an enormous range of responsibilities, are forced to spend over 50 full working days per year gathering payment for services already rendered.

Impacts on performance

Small businesses tend to rely more on an individual business owner’s guidance than larger businesses with larger management structures. By monopolising so much of an entrepreneur’s time, these payment problems leave businesses without the guidance they need to operate as smoothly and effectively as international competitors in friendlier environments.

Loss of capital

Without stable and reliable income, businesses can’t take the risks that they need to in order to grow and establish themselves more firmly. Instead, they’re forced to try to save for unpredictable cash flow interruptions. Businesses can’t deal with non-payment by scrambling to find other paying clients, because those clients also won’t pay in time to deal with the shortfall. The culture of late payments deprives them of the funds they need, and then additionally interferes with efforts to address the problem.

What’s being done about it?

The ASBFEO has made a long list of recommendations to the Australian Government to help solve the problem. Most notably, the report suggests:

●       That the Australian Government adopt a 15 day payment time

●       That the Australian Government procure preferentially from businesses that that have 15 day or shorter payment times

●       That the Australian Government set maximum payment times for business-to-business transactions

●       That large businesses be required to to publicly disclose their payment times and practices as well as their performance against those terms.

However, potential government regulation isn’t the only direction from which progress might come. Some very prominent businesses are also working to develop solutions on their own to address the problem and to foster an atmosphere of cooperation between big businesses and their smaller partners. The Business Council of Australia, with the endorsement of the Council of Small Business Organisations of Australia, recently launched the Australian Supplier Payment Code. This is a voluntary measure in which signatories pledge to pay on time, no more than 30 days after invoicing, and to assist smaller partners in implementing time-saving technologies to manage invoicing and payments.

In effect, this measure achieves much the same result as the ASBFEO’s recommended disclosure of payment performance. The Australian Supplier Payment Code gives small businesses a clear picture of which current and potential clients are committed to fair payment times and practices, and allows them to make informed decisions about who to work with. This, in turn, puts pressure on businesses who need access to services from these SMEs to sign on and to improve their practices. No matter exactly how it happens, it appears that payment conditions are set to improve for small businesses in Australia.