Laws to stop late payments needed to prevent big end of town from hurting SMEs: Ombudsman

Australia’s small business ombudsman says if the government is committed to jobs and growth it should consider legislating on payment times to fight multinational corporations stalling the economy by taking up to four months to pay smaller businesses.

Kate Carnell’s words come as a study of more than 350 mid-sized businesses by RFI for American Express estimates that one third of mid-sized businesses can’t reconcile all their invoices at least every other month.

The research estimates SMEs owe more than $8 billion to suppliers, and $2 billion of this is overdue, as companies scramble to clear invoices fast enough to be able to pay their own suppliers.

Carnell told SmartCompany this morning that after spending months hearing stories from SMEs for her payment times inquiry, the ombudsman’s office is “increasingly believing that [solving] it will require a level of regulation”.

“What we are being told is that voluntary codes are not working,” Carnell says.

Read more: Company profits jump 26%: Should SMEs be feeling more confident after those numbers?

Carnell believes the move by some big corporations to use 120-day payment terms as their standard is damaging to Australia’s overall economy, including on the mental health of SME owners.

“What it appears is that the big multinationals moving to standard payment terms in excess of 60 days is affecting the whole supply chain, including mid tier companies. At the end of the day where the dominos stop is with small businesses, because they have no one else to pass it on to.”

The report from the Australian Small Business and Family Enterprise Ombudsman’s (ASBFEO)  inquiry into payment times is due to be handed down in coming weeks, and the findings should be a top priority for the government, says Carnell.

“The government has a strong commitment to jobs and growth, and this is affecting the entire economy.

“Big multinationals are using the excuse in Australia that the decisions [about payment times] are being made offshore, they’re nothing to do with them, they can’t help it. The only thing that would change that is they obviously say that they will comply with the laws that they operate in. It’s really, ‘unless you legislate, we won’t do anything’,” Carnell says.

Martin Seward, vice president for small and medium enterprises at American Express Australia, says that while the current payment time stats are alarming, on-time or early payments can have significant benefits for the whole supply chain.

“In fact, more than half (54%) of Australian mid-sized businesses unlocked $1.84 billion in savings last year through negotiating early payment discounts with their suppliers, leaving them open to extra cash flow to reinvest back into the business,” he says.

While some big Australian businesses, including Telstra, have made individual commitments to faster payment times, Carnell remains sceptical that the big end of town will self-regulate to make sure smaller operators get invoices cleared in a reasonable time.

And she warns this issue flows through to a number of other big economic worries currently in play.

“The government is looking at why business investment is low, well here’s an example of why: you can’t invest if you can’t be confident of when you’re going to be paid,” she says.

Never miss a story: sign up to SmartCompany’s free daily newsletter and find our best stories on Twitter, Facebook, LinkedIn and Instagram.