ASBFEO calls for new supply chain finance legislation

The call is one of several recommendations made in the ombudsman’s final report for the review into supply chain financing.

The review, which was launched in October 2019, examined the impact that supply chain finance has had on the small business and family enterprise sector, and in particular, how larger companies may have abused this form of finance to alter payment times, at the expense of SMEs.

Throughout the review, Ms Carnell highlighted 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.

The final report, released on Monday (20 April) has 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.

Further, the report found that smaller businesses, particularly those with less than $10 million annual turnover, are disproportionately hit with the longest wait times for payment of invoices.

Additionally, the review found that the impact of COVID-19 has further blown out the time that SMEs are forced to wait for payment, adding to the already difficult economy that Australian businesses are navigating.

As such, the review calls for greater protections for SMEs to be introduced into federal legislation, including:

• A consistent definition of “small business” for the purposes of payment times and unfair contract terms – with the suggestion of an annual turnover under $10 million per annum as a benchmark, to be reviewed every three years;
• Implementation of a comprehensive Payment Times Reporting Framework, which would require large businesses to publicly report on their payment times to small business suppliers;
• Introduction of a mandatory standardised payment term of 30 days or less from receipt of invoices from small businesses to be legislated;
• Supply chain financing to be offered as a legitimate choice for small businesses to reduce payment times to less than 30 days, with supply chain finance providers urged not to provide their products endeavouring the extend payment times to small businesses beyond 30 days;
• Accounting standards altered to provide greater clarity and properly cover supply chain financing to ensure that accounts cannot be manipulated, particularly to mask cash flow issues and insolvency;
• The ACCC should review supply chain finance provider activity from an Australian competition law viewpoint, including how data is applied through the use of artificial intelligence and algorithms; and
• Treasury and ASIC should review whether supply chain financing should be a regulated financial product with coverage of rate setting.

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.

Ms Carnell therefore stated that large businesses extending or suspending payments to small business suppliers, particularly during the fallout of the COVID-19 crisis, are “on notice that this business is unacceptable”.

“There’s no denying businesses of all shapes and sizes are enduring extraordinary challenges as a result of the [coronavirus] crisis, but small businesses are being hit hardest,” she said.

“Many small businesses have been forced to close their doors and a lot may not survive the coming months, even with significant support from the government. 

“That’s why it is more important than ever to ensure small businesses are paid on time.

“We know that if small businesses are paid on time, the whole economy benefits. On the flip side, a lack of cash flow is the leading cause of insolvency.

“Legislation requiring SMEs to be paid in 30 days is the only way to drive meaningful cultural change in business payment performance across the economy.”

She stated that, should the Australian government choose to provide greater legislative protections for SMEs, “it would not be alone”.

“Just recently, legislation was tabled in the UK that stipulates a uniform 30-day statutory limit for payment of invoices and provides for enforcement of financial penalties for late payments," Ms Carnell said.

The Supply Chain Financing Review called out a number of household-name businesses that have engagement in poor payment practices with smaller suppliers, highlighting that current, voluntary, systems to protect small businesses are ineffective, according to Ms Carnell.

“Our [review] has revealed the voluntary Supplier Payment Code is not effective. There is no compliance monitoring and it is actually unenforceable. This is consistent with similar systems internationally,” she said.

She concluded by stating that genuine and appropriate use of supply chain finance would be beneficial to small businesses, particularly amidst the COVID-19 pandemic, so long as appropriate measures are taken to protect SMEs.

“When used appropriately, supply chain finance is a legitimate and effective product that can be used to [free up] cash flow for small and family businesses,” Ms Carnell said.

In fact, it may be particularly useful to small businesses that need to be paid faster as they navigate their way through the COVID-19 crisis.

“However it is critical that harm inflicted on small businesses as a result of misuse of these products be urgently addressed,” she said.

[Related: ASBFEO calls for 30-day payment terms for SMEs]