Australian small businesses have been forced to deal with late payment times for years, despite repeated government attempts to deal with the issue. Now, tracking data up to June 2018, data analytics firm illion has found that late payment times have finally dipped significantly to an average of 11 days late, down from 22 days in 2011.
Despite this improvement, however, the Australian Competition and Consumer Commission’s report has indicated that businesses are still dealing with significant payment issues that haven’t been addressed so far. While they aren’t being paid as late, small businesses still suffer under unfair contractual payment terms by large multinational firms. Further, payment scams are on the rise, raising the threat of a new type of cash flow interruption that can victimise a business while simultaneously also harming their suppliers. To keep cash flow stable, and to maintain the control they need to drive growth and compete, businesses need alternative financing options.
Unfair payment terms are still rampant
Improvements in payment times for small businesses have specifically targeted late payments so far. The result of this is that, while more businesses are being paid on time, those payments often still aren’t actually due until 60, 90, or 120 days after invoicing. This means that a small businesses that’s forced to accept a 90 day payment term from a large client would now wait 101 days on average to actually receive payment, as opposed to 112 days in 2011. While it’s an improvement, it’s not as significant as it first appears for small businesses.
While small business income is made more predictable by improvements in late payment times, small businesses need access to the revenue they earn sooner if they want to grow and compete effectively in the short term. As it is now, a business that’s forced to accept unfair payment terms will be left out of pocket for months after invoicing, even when their client pays on time. In effect, these typically big business clients use their small business suppliers as a type of free lending system, wherein they withhold payments as long as possible in order to boost their own working capital and maximise their spending power.
Small businesses are falling victim to scams
Because they’re forced to wait so long to receive payment for completed work, it can be difficult for businesses to react to cash flow interruptions. Increasingly, these involve those business’ own outgoing payments, creating more issues down the supply line while also harming the victimised business. The ACCC indicated that thousands of businesses reported being scammed, with total losses in 2018 already at over $2.3 million. Most often, these take the form of email scams wherein someone impersonates a business’ supplier, and uses a similar-sounding email address to fraudulently update their payment information. The resulting losses represent a significant strain on small businesses, who typically operate on very tight budgets, and can’t afford for an outgoing payment to simply go missing.
A business facing unexpected short term costs like these or others can’t raise prices, or simply seek additional work, to cover the expenses, because the results of any such adjustment wouldn’t be felt for months. To deal with cash flow interruptions, businesses need fast access to financing solutions, and financial tools that allow them to access the funds that they’ve already earned.
Small businesses need immediate solutions
Not only do businesses need access to the money they’ve earned sooner, they can’t realistically wait for the government to forcibly shorten payment terms. Fortunately, the tools small businesses need already exist.
Supply chain finance
By using supply chain finance, small businesses can boost their working capital in much the same way that their clients might be doing, by deferring outgoing payments. Unlike those, however, their own suppliers will still be paid in a timely manner. Businesses can do this by paying suppliers out of a third party credit fund, and then paying off the balance on that fund at a later date. In this way, businesses can free up additional cash to cover cash flow issues without being forced to take out a loan or juggle other payments.
The simplest way to deal with the issue of long payment terms is to use invoice financing. Instead of waiting months for payments to come in, businesses can simply hand outstanding invoices to their financial institution for most of their value up front. The financial institution will then collect the payment from the client on their own, and issue the remaining funds at that time, minus their predetermined fee.
It’s unclear if and when small businesses in Australia will have access to fair payment terms. In the meantime, however, business owners who educate themselves about the financing options that are available to them can overcome these challenges regardless. By properly applying the tools that are available to them, even businesses facing significant obstacles can grow and find success in their industries today.