Government must legislate on payment terms

Small Business Ombudsman Kate Carnell. Picture Kym Smith
Small Business Ombudsman Kate Carnell. Picture Kym Smith
The Australian, 

Small Business Ombudsman Kate Carnell’s idea of standardising payment terms at 30 days for all businesses is a good one and deserves to be seriously looked at.

The trouble is she hasn’t yet taken the next step and recommended legislation. Her draft recommendation says: “The minimum standard for all supplier payments (regardless of supplier size) should be 30 days.”

So it should, but the only way that could be applied nationally, to all businesses, is through federal legislation, which would be a very big deal indeed – an almost unprecedented government intervention in the market. It’s implied in Carnell’s recommendation but should be explicit.

The disease of late payments has become an epidemic, with large companies routinely screwing small suppliers because they can.

In a way Telstra and Rio Tinto have merely highlighted the problem by moving to 20-day terms themselves, in Telstra’s case for invoices up to $2 million while Rio Tinto is doing it for companies with annual turnovers up to $10 million.

But that begs the question of why shouldn’t Telstra pay invoices of $2.1 million within 20 days, and why should Rio Tinto companies with $11 million turnover take longer than 20 days – probably more like 90 days – to get paid? Kate Carnell is right: it should be a standard 30 days for all payments, backed by legislation (although she doesn’t say that).

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After all, the supplier doesn’t have to be a very small business for there to be a power imbalance; larger companies in a competitive market can find themselves waiting 90 days for payment, with just as many problems funding the working capital as a small business.

And it’s not just a matter of fairness and the misuse of power – late payments have a depressing effect on the economy. As my colleague Robert Gottliebsen wrote here on Saturday, “…Carnell has shown the government how to give the economy a much-needed $7bn boost without government outlays.”

In her report, Carnell says late payments by large business to small business account for 53 per cent of invoices. “This means that $115 billion worth of payments to small business are late and stops $7 billion of working capital being available to small businesses every year.”

At a time when the Reserve Bank and federal government seem to be working against each other – the RBA trying to stimulate the economy without causing another property boom, and the government moving from budget deficit to surplus – it seems logical to try a stimulus measure that won’t affect the budget and won’t boost house prices.

Apart from giving the economy a real boost by freeing up a huge amount of working capital for the main employers in the country (small businesses), this would protect small businesses from bullying by more powerful customers.

More specifically, Kate Carnell has blown the whistle on the current “supplier payment code” drawn up by the Business Council of Australia, because it’s both voluntary and loose – it applies only to small businesses and the definition of them is both too tight and easily fudged, and not policed anyway.

The supplier payment code is just an empty PR exercise, with BCA wanting to appear to be doing something about late payments, but actually doing nothing of the sort.

And what is happening with supply chain finance is an absolute scandal: big companies are routinely stretching out payments from 30 to 60 and 90 days and then offering to pay suppliers earlier in return for a discount on the invoice.

This is little more than extortion and should be prosecuted. What’s more it is really a financial product and should be regulated as such, including the interest rates that are expressed as invoice discounts.

In fact, Carnell says that large companies and financiers that are doing supply chain finance are using artificial intelligence to analyse huge amounts of data about creditworthiness and to predict the behaviour of suppliers.

“It is unreasonable for large businesses to use complicated and expensive AI systems to manipulate small businesses into reducing their margins.”

The starting point for reform should be to clean up and standardise the definition of small business for the purpose of the supplier payments code and other regulation about the relationship between large and small businesses.

Most use the restrictive “fewer than 20 employees” definition, but some go with both an employee number (less than 20 employees) and a turnover threshold (less than $10m turnover), and the business has to meet both criteria, which makes it doubly tight and easy to avoid.

There is clearly a role for the ACCC to look at whether there’s a misuse of market power, and also for ASIC, in whether supply chain financing should be a regulated financial product.

But above all, the federal government needs to look at simply passing a law that requires all suppliers to be paid with 30 days.

It has already gone part of the way down this path.

In November 2018 the government announced 20-day payment terms for government contracts under $1m, which was actually implemented on July 1 last year, and five-day payment terms where both government and business are using e-invoice.

The government also said that it “will require those same large businesses seeking to tender for government contracts to match our 20-day payment policy”.

But why just require that of companies tendering for government contracts? It needs to apply to all businesses.