SMEs’ late-payment agony grows

Moves by big business to extend payment terms even further will only add to SMEs’ pain. By MIKE PRESTON.

By Mike Preston

The days of the standard 30 day trade payment period are dead. Increasingly, big businesses are using their market clout to wring every last drop of credit out of SME debtors who have little choice but to accept the terms offered to them.

Last month’s decision by beverage multinational Foster’s to unilaterally increase the time it makes its suppliers wait to be paid from 30 to 45 days is a classic example of just how vulnerable SMEs can be to exploitation by big debtors with market muscle.

The depth of the pain SMEs are feeling is revealed in the latest SME Opinion Leaders poll, a survey of 315 SMEs owners across the country conducted by SmartCompany in conjunction with Roy Morgan Research and Dun & Bradstreet.

Strikingly, more then a third of SMEs surveyed by the poll say they are being left to struggle with cash flow difficulties as a result of late bill payments from clients, while 44% report that the problems with late bill payments are getting worse. There is little doubt that the 600,000 small businesses that owe the tax office money are being further affected by these late payments.

The majority of SMEs say they no longer regularly expect clients to pay on time. Just over 30% of SME owners surveyed say very few clients pay their bills on time, while the number who say some of their customers do is just a little higher at 41%. Just 28% report that most of their clients comply with the payments terms asked of them.

And it won’t come as a surprise to most SME owners that the chief culprit when it comes to bill payment tardiness is big business. The SME Opinion Leaders poll found that 56% of SME owners find that big businesses are the slowest payers, compared to 35% who point to the finger at other small businesses, a figure that could itself be distorted by the many SMEs who are forced to delay their own repayments while they wait for a large client to pay them.

The SME Opinion Leaders poll reveals that 70% of SMEs wait an average of 30 days or more to have their bills paid. Of that group, 20% have their bills paid within 46–60 days on average and 6% wait a whopping 61 days or more.

And the old standard 30 day payment period? Today, only 30% of SMEs say they usually expect to wait less than 30 days to be paid by other businesses for the goods or services they provide.

These findings are confirmed by trade payment analysis conducted by credit management and research firm Dun & Bradstreet. It found that on average, businesses waited 55.7 days to be paid in the March 2007 quarter.

Christine Christian, the chief executive of Dun & Bradstreet (Australia), says that apart from a slight blowout in average debtor days in the mining and resources sector, these figures are accurate for the June 2007 quarter.

“Businesses are already facing tough conditions, with inflation remaining in the economy and the constant threat of another interest rate rise,” she says. “The additional burden of cash flow problems created by late business-to-business trade payments will place additional pressure on business and may result in an increase in company insolvencies, particularly in the SME market.”

Insolvency can loom even larger for SMEs that face the double crunch of slow-to-pay debtors and monthly GST payments. For businesses that use accrual accounting, this means paying 10% GST on applicable sales at the end of each month, even if they are still waiting for payment.

Gerry Raleigh, who owns a small panel beating business, Kerry Panels, and is a long-time campaigner for government action to protect SMEs from late payments, says the result is that many SMEs are effectively providing credit both to big business and the Federal Government.

“The current arrangement is Sheriff of Nottingham stuff – it seems to be all about taking from those who can’t afford it and giving to big businesses and the Government who can,” he says.

Raleigh, who has been pre-selected as the Labor candidate for the federal seat of Aston, in Melbourne’s outer east, says both the Government and Labor have failed to act to protect SMEs.

Governments are slow payers. The SME Opinion Leaders poll figures showed that 24% of SMEs find state governments to be their slowest payers, while 12% nominated the Federal Government.

Labor small business spokesman Craig Emerson introduced a private member’s bill to Parliament on June 18, which, if passed, would require the Government to pay interest after 30 days on payments to small businesses turning over less than $2 million.

The bill is unlikely to receive Government backing and so is expected to fail. Small Business Minister Fran Bailey is reported as saying she is “underwhelmed” by Emerson’s proposal.

Bailey has called for a “name and shame” file on late-paying businesses. She says the Federal Government has worked hard to get its bills paid on time, and that there is no reason companies, particularly large companies, should be late payers.

Raleigh believes Bailey’s is blasé about small business and its problems, and that Emerson’s bill, although better than nothing, does not represent a big improvement over the status quo.

He says what SMEs need are laws to help small businesses claim interest or penalties on late payment by big customers and ease the GST double crunch. Such a law was proposed by Labor in 2003, but now both the Opposition and the Government say they do not want to impose extra red tape on business by regulating late payments.

In the meantime, SMEs have to rely on themselves. Respondents to the SME Opinion Leaders poll say the following measures as effective in getting bills paid on time:

• 31% recommend making demand phone calls to debtors
• 24% recommend adding very clear terms on sales contracts
• 15% recommend polite letters reminding debtors to pay
• 8% recommend threatening to stop supply
• 5% recommend sending a demanding email to debtors

Dun & Bradstreet’s Christine Christian gives these tips for reducing your debtor days:

• Assess risk very, very closely before extending credit to new and existing customers.
• Consider shortening your terms of payment.
• Be rigorous about debt collection. Dun & Bradstreet’s debt scoring models show if you chase debts before they are 150 days past due you are four times more likely to collect them.
• Jump on to large debts immediately. Dun & Bradstreet research shows there is a 55.2% success rate of recovery of a $5000 debt, compared to a 31.2% chance of recovery of a $25,000 debt.
• Build automatic reminder dates into your receivables processes to ensure a rigid plan of debt recovery is maintained.
• Consider outsourcing debt collection if debtor numbers or dollars owed are getting out of control.

Click here to read more tips on managing cashflow.