ASBFEO calls for 30-day payment terms for SMEs

The review, which was launched in October 2019, examines the impact that supply chain finance has had on the small business and family enterprise sector.

It aims to ascertain how small businesses and the family enterprise sector use this form of finance to manage growth, and examine ways in which the products may have been abused by large companies.

While a final report is expected by the end of March 2020, the ASBFEO has now released a position paper with initial findings and a range of draft recommendations, which are open for consultation.

Among the draft recommendations, the Ombudsman makes calls for a consistent industry-wide definition for “small business” and a mandatory supplier payment code that would enforce a maximum 30-day payment term for all businesses.

Key preliminary findings

Within the position paper, Ms Carnell highlights that supply chain financing is, and remains, a “legitimate and effective tool to free up cash flow for small and family business”, but warned that large businesses have utilised these products to enforce extended payment terms on smaller suppliers.

According to the Ombudsman, small businesses rely on appropriate payment terms of 30 days or less, in order to maintain cash flow and grow their businesses.

However, the preliminary findings of the review have found that there is a practice of bigger businesses extending their invoice payment terms, at times up to 90 days, and then offering small-business suppliers payment within 30 days via supply chain financing, in exchange for a discount off the total invoice.

The preliminary report also examined the shortcomings of the current Supplier Payment Code, which was introduced in May 2017 by the Business Council of Australia, in order to protect small business and promote the use of acceptable payment terms – within 30 days of invoice.

According to the Ombudsman, the current code does not provide a cohesive and appropriate definition for a “small business”, which is “wide open to manipulation” by larger businesses, to enforce unreasonable payment terms.

Further, signatories of the current code are entirely voluntary, with no monitoring of compliance and no way to enforce signatories to uphold the details of the code.

Additionally, the preliminary report found that some big businesses have been using supply chain finance platforms and utilising methods – including data mining – to alter the price of services, based on what it is believed the small-business supplier might be willing to accept.

Draft recommendations

The Ombudsman has therefore put forward the following draft recommendations to better regulate the relations between large and small businesses, particularly in regard to supply chain finance (SCF):

1. A consistent small business definition - The small business definition adopted across government should be either to simply define small business as not including, say, the top 100 companies or “(a) a small business has fewer than 100 employees or (b) less than 100 employees, with satisfaction of either (a) or (b) being sufficient to qualify as a small business”.
2. Enforceable payment times - The Supplier Payment Code should be replaced by the Commonwealth Government’s Payment Times Reporting Framework, with that framework being administered and enforced by an appropriately funded, empowered and proactive entity.
3. 30-day payment standard - The minimum standard for all supplier payments (regardless of supplier size) should be 30 days.
4. Supply chain financing as a real choice - SCF should be available to small business to reduce payment times from 30 days to better.
5. Appropriate coverage by accounting standards - The accounting standards need to provide greater clarity and properly cover SCF to ensure that accounts cannot be manipulated, particularly to mask cash flow issues and insolvency.
6. Further review from competition perspective - The ACCC should review SCF provider activity from an Australian Competition Law viewpoint, including how data is applied through using artificial intelligence and algorithms.
7. Further review from regulated financial product perspective - Treasury and ASIC should review whether SCF should be a regulated financial product with coverage of rate setting.

Commenting on the release of the position paper, Ms Carnell reiterated that, when used correctly, supply chain financing is an effective tool in order to free up cash flow for small businesses.

“However, our review has found that too many big businesses have extended payment times and then offered supply chain finance. 

“This practice severely impacts small-business suppliers and is totally unacceptable,” Ms Carnell said.

She continued: “The fact is that all businesses, regardless of their size, should be paid in 30 days, and supply chain finance should be available to those small businesses that want to be paid faster.

“Rates should be set across markets and not through the use of technology aimed at targeting and squeezing small-business suppliers, including those already in distress.

“The question of regulation remains live, and we’ve made a draft recommendation that further consideration be given to whether supply chain finance should be a regulated financial product.”

The Ombudsman is currently seeking feedback on its draft recommendations from any interested parties, prior to the finalisation of its recommendations in the final report. 

Feedback submissions close Friday, 28 February.

Ombudsman welcomes industry action

In light of the initial findings outlined in the Supply Chain Finance Review position paper, Greensill Capital has announced that it will no longer provide its supply chain finance services to big companies that do not offer fair payment terms, in a decision that was welcomed by Ombudsman Kate Carnell.

“We are delighted to see that Greensill Capital will no longer provide their product to businesses with poor payment terms, that is, in excess of 30 days,” Ms Carnell said.

“A key recommendation of our position paper is that all businesses, regardless of their size, should be paid within 30 days.

“Where payment terms are 30 days or less, supply chain finance should be available to those small businesses that want to be paid faster.

“We have a real problem when large businesses extend their payment terms from 30 days to 60, or even 90 days, and then offer a supply chain financing product to those small-business suppliers who are forced to take a haircut to get paid on time.”

She continued: “[The] announcement by Greensill Capital makes it clear that supply chain financing businesses won’t be used as a whipping boy for the appalling treatment of small business by large businesses.

“It is great to see businesses like Greensill Capital, along with Telstra and Rio Tinto, show corporate leadership on this issue.

“We will continue to monitor Australia’s other corporate players and encourage them to follow the leadership of these companies.”

[Related: Warning issued over supply chain finance mining]