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12 April 2017

Small business should never be a bank for big business, says ASBFEO Payment Times Final Report

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) today called on the Australian Government to legislate to set a maximum payment time for big businesses to pay their small business suppliers.

The ASBFEO today released findings from its Inquiry into Payment Times and Practices in Australia.

The Inquiry found widespread evidence of a growing trend for Australian and multinational companies to delay and extend payments to their suppliers with typical payment times of 30 days moving out to 45, 60, 90 or 120 days.

The ASBFEO Kate Carnell said: “Extending payment times for suppliers effectively uses the businesses in the supply chain as a cheap form of finance.

“Something must be done. Small business should never have to act as a bank for big business, helping to finance multinational companies.

“This growing trend for extended payment times impacts the economy by slowing down the flow of cash through supply chains, which limits growth of businesses because they have more capital tied up in financing their operations and it raises the costs for businesses financing longer trade credit to their suppliers.

“When a business experiencing extended payment times is also hit with late payments, it stresses the business further, which can easily put them out of business. Poor cash flow is the primary reason for insolvency in Australia.”

The key recommendations of the ASBFEO Payment Times and Practices Inquiry are:

•    The Australian Government to introduce legislation to set a maximum payment time for business-to-business transactions. Terms greater than this can be agreed when it is not grossly unfair

•    The Australian Government to adopt a 15 business working day limit on payment terms from July 2018

•    The Australian Government to introduce legislation for large business to disclose publicly all of their payment terms and performance against those terms

•    The Australian Government to procure from businesses which have supply chain payment practices equal to or better than government terms.

Ms Carnell said the Australian Government needed to legislate a maximum payment time to set the standard on what was considered an appropriate upper limit on payment times for businesses operating in the Australian economy.

 “Terms greater than this can be agreed by both parties to meet specific industry needs, however, where longer terms are called into dispute they may be considered to be an unfair contract term,” she said.

Ms Carnell welcomed the proposal for a voluntary industry prompt payment code although overseas experience clearly showed that voluntary measures did not compel all businesses to change their practices on extended payment terms or late payments.

She said although voluntary codes had been shown not to be entirely effective, minimum best practice would require a code to define a maximum payment time and contain a mechanism to automatically apply late payment penalties either through interest measures of other forms of compensation.

Also, minimum best practice would require regular, independent and public reporting to determine its effectiveness.

The Payment Times and Practices Final Report also recommends that the Australian Government maximise its role to set the standard on faster payment times to suppliers.

The ASBFEO recommended that the Australian Government adopt a payment term limit of 15 business working days by July 2018 to set an example for faster payments to suppliers.

Ms Carnell said the standard government payment term was 30 days and a study in the United States had demonstrated that faster payments through supply chains had increased annual payroll by $6 billion and created more than 75,000 additional jobs over three years.

She said that despite government prompt payment policies some government entities paid their suppliers late and many suppliers did not seek a late payment penalty for fear of antagonising the government entity.

The State Small Business Commissioners will also progress discussions on the Report’s recommendations with their respective governments.

An ASBFEO survey conducted as part of the inquiry found:

•    Around one in two respondents reported more than 40 per cent of their invoices were paid late last financial year

•    Almost half of businesses have more than $20,000 owing to them from late payments and 14 per cent of businesses have more than $100,000 owing

•    More than half of respondents said that large/multinational businesses “always” or “frequently” make late payments. Twenty-one per cent of respondents said Australian Government departments and agencies “always” or “frequently” make late payments.

Ms Carnell said that behind the economic harm done to small-to-medium businesses from late payments there were adverse impacts on mental wellbeing through stress, anxiety and impacts on families.

The Final Report of the Payment Times and Practices Inquiry can be viewed here

If your small business is a contracted supplier of goods or services and you believe that you are subject to unreasonable payment times or practices, or you are having difficulty securing payment from your customer within agreed payment times, the ASBFEO may be able to provide you with assistance.

Requests for assistance with payment terms can be made via telephone on 1300 650 460 or by submitting an online enquiry through /assistance/lodge-a-dispute.

All other enquiries regarding the Ombudsman’s report should be directed to (02) 6121 3000.

Background on Payment Times and Practices Final Report

The office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) conducted its first self-initiated inquiry from November 2016 to March 2017 on Payment Times and Practices in Australia.

The Inquiry was the result of feedback from small business and family enterprises during 2016. They said that both late and extended payments were their number one problem.

The Inquiry was conducted in consultation with State-based Small Business Commissioners, the Council of Small Business Australia (COSBOA), the Australian Institute of Credit Management (AICM) and the Institute of Public Accountants (IPA).

The Terms of Reference were to consider:

•    The practice of corporations setting payment terms, particularly for small business

•    Trends in payment terms and late payments with emphasis on commercial dealings between small business and large corporations

•    The effects and impacts of long payment times on small businesses

•    The availability of potential regulatory and market-based responses, including recent developments such as unfair contracts legislation.