Due to a number of factors, including rising global economic uncertainty, and the royal commission into banking practices, Australian lenders have become significantly more conservative with regard to the issuing of loans. This has hit SMEs particularly hard. Falling real estate prices, depressed by the lending slowdown, make it more difficult for business owners to use their private real estate to fund their business activities.
This, in turn, has brought the attention of lawmakers back to Australia’s 2017 late payment inquiry. Kate Carnell, the ASBFEO, indicated in her report that SMEs suffered significant hardships as a result of unfair payment terms. In the past, however, many dealt with late payments through financing. With traditional financing methods becoming less accessible, political pressure is building to address late payments legislatively as a way to help small businesses.
One political party has unveiled a policy, largely in line with the ASBFEO’s recommendations, to regulate payment terms, and to legally punish violators. This, in turn, will place financial pressure on larger businesses, who also have their own financing issues to manage. Fortunately, alternative finance tools like supply chain finance provide an elegant solution.
Voluntary measures have had little effect
In response to calls for regulation immediately after the ASBFEO’s report, the Business Council of Australia launched the Australian Supplier Payment Code. This is a voluntary measure, to which businesses can commit to signal that they pay supplier invoices within 30 days. Unfortunately, just over 80 businesses ever signed on, doing very little to tackle the issue on a national level.
In 2018, the Australian government, as well as some state governments, committed to making payments no more than 30 days after invoicing, eventually planning to reduce that time to 20 days by July 1, 2019. Additionally, government contractors with an annual turnover of greater than $100 million will also be required to make payments within 20 days in order to maintain their contracts.
Building financial pressure for larger businesses
While these developments come as good news for small businesses, they represent significant new financial trouble for larger enterprises. While bigger businesses don’t normally rely on private real estate to secure funding, rising risk aversion among lenders has still affected them. This makes it more difficult for them to manage their own working capital, and to make timely payments. With stiff penalties on the horizon, these businesses need a fast, practical solution that will allow them to avoid additional legal costs, while ensuring that suppliers are paid in a timely manner.
Supply chain finance provides answers
While traditional lenders are taking a back seat on this issue, alternative financing provides a custom-tailored solution. Supply chain finance is designed to ensure that suppliers are paid on time, or even early, without straining the paying business’ resources.
How it works
Instead of paying directly out of their own pockets, businesses can instead pay suppliers through a credit fund that’s furnished by outside investors. When an invoice is due, the business can simply pay their suppliers, even during some form of cash flow interruption. The balance on that credit fund can then be paid off when funds come in, or payments can be deferred to a later date if needed. This ensures that businesses are able to operate smoothly and keep their suppliers happy, even when their own cash flows are less than perfect.
Save money by paying early – at no cost
A particularly valuable feature for both businesses and their suppliers is the option to pay early in exchange for a discount. When a supplier needs a cash advance to manage a cash flow issue of their own, they can negotiate for early payment in exchange for a discount. If the client business agrees, payment is released to the supplier early, and the business ends up paying less. This is a win-win-win situation for businesses because it means that suppliers are paid sooner and kept more financially stable, supplier payments can be deferred longer, and total supplier costs are actually reduced.
Supply chain finance, as well as a number of other alternative finance tools like trade finance, invoice finance, and unsecured business loans, provide businesses of all sizes with the tools they need to respond to cash flow issues quickly. Unlike traditional financing, these solutions can be implemented in a matter of just a few days. Better yet, they’re accessible to businesses of all sizes, with financial histories of all kinds. Fifo Capital, and other financial institutions like it, work by building close 1:1 relationships with clients that allow them to accurately manage risk while keeping businesses solvent and growing.