Late payments hinder business growth

Late payments are a perpetual problem for businesses around the world, including Australia. When doing business, companies typically agree to payment terms in exchange for goods and services.

However, according to research, Australian businesses receive their payments consistently late – almost 10 days overdue to be precise.^[1]

On average, that’s more than a full third longer for businesses on 30-day terms, which applies to 96% of all businesses surveyed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).^[2]

According to that survey, 1 in 2 respondents reported greater than 40% of their invoices were paid late.^[3]

And small businesses are hit the hardest.

According to Xero, late payments by large businesses to small businesses account for 53% of invoices.^[4] So put another way, small businesses are effectively funding the cash flow of larger companies. This leads to increased pressure on small business and a stall on money circulating in the economy.^[5]

Legislative changes on the horizon

Amid a fresh wave of big businesses using the COVID-19 crisis as an excuse for delayed or extended payment times, the ASBFEO recently reiterated the need for federal legislation requiring small businesses to be paid in 30 days.

Delayed payments have a direct and severe impact on the working capital and growth potential of small and medium enterprises. Instead of being paid on time and using the cash flow to grow, SMEs are forced to borrow, use credit cards or find other ways to finance their working capital shortfall.

Long payment terms and late payments add significant cash flow pressure to SMEs. And lack of cash flow is a leading cause of business insolvency, underscoring the importance of late payments as an issue that can easily put many businesses out of operation.

Coinciding with the recent surge in larger businesses pushing out payment times to their small business suppliers, and ASBFEO’s recommendation, the federal government introduced a draft Payment Times Reporting Framework legislation.

The bill will require businesses with turnover of more than $100 million to publish information about their payment policies, reporting on how quickly they actually pay their small business suppliers. This applies to around 3,000 Australian large businesses, including foreign subsidiaries along with certain government enterprises.

The legislation also defines a small business as those with a turnover of less than $10 million, a definition that covers 99% of all businesses, as in the past inconsistent or ambiguous definitions of “small business” masked the extent of the late payments problem.

To echo the sentiments and recommendations of ASBFEO, it’s evident that more support is needed to help SMEs get paid on time, preserve their cash flow and enable growth.

To learn more about SME Trade Credit, the case for a new model and how Shift Payments can streamline your payment terms, download the report.

[1] Australian Late Payments Report, December Quarter Analysis 2019, ilion.

[2]Payment Times Inquiry in 2017, Australian Small Business and Family Enterprise Ombudsman.

[3] Survey results – Payment Times and Practices Survey 2016-17, ASBFEO (n = 2,758).

[4] Xero Small Business Insights, ‘Paying the price, the economic impact of big businesses paying Australian small businesses late’, June 2019.

[5] Supply Chain Finance Review – Final Report, March 2020, Australian Small Business and Family Enterprise Ombudsman.