The Extended Impact of Extended Payment Terms


The Extended Impact of Extended Payment Terms

Scroll through Smallville posts, and you will encounter a significant number that deal with the #1 critical issue for Small Business owners, cash flow.

My fellow Smallville contributor Amanda Fisher is known as the ‘Cash Flow Queen’ for her excellent work with Small Business owners on this topic. I have even written about the importance of cash flow myself. I have also written extensively on the impact of big companies imposing extended payment terms on their small suppliers, up to 120 days in some cases. On top of that, Australia holds the world record for late payment of invoices (that’s one world record that we shouldn’t be proud of).

The impact of later payments spreads.

But late payments doesn’t just harm the business that is not getting paid. Because one business doesn’t have cash, that business will most probably extend payment times to their own suppliers, or not hire an additional person, or not invest in new equipment. We have known these flow-on effects on the wider community are real, and at last, there is some empirical research to quantify it.

One regional area that has been dramatically affected by extended payment terms is the coal-mining area around Central Queensland. When the mining industry went into decline in 2013, several of the large mining houses imposed unilateral payment terms of up to 90 days on their suppliers. This was done to shore up their own cash reserves; effectively asking their suppliers (including small and micro businesses) to become their bankers.

On top of the loss of business as mining companies slashed their overall spend, this was a fatal blow to many Small (and large) Businesses across the region. Many of these businesses did not survive. Now, in 2018, the fortunes of the coal industry have reversed. Prices have recovered, production is up, and development projects are in full swing, but the extended payment terms remain (note: Rio Tinto reverted to 30-day terms for small suppliers in May 2017).

To quantify the region-wide impact of these unilateral extensions of payment terms, a Queensland-based industry group commissioned a research report. The results are stunning. The report concluded that:

“If payment terns across the industry were returned to a “normal” 30 days, there would be an extra 250 jobs across the region.”

Over five years, this would generate:

  • An additional 380 jobs.
  • $150 million in wages.
  • $250 million in Gross Regional Product.

Would you be my banker?

As I mentioned earlier, extended payment terms starve a Small Business of cash flow, so they must find it elsewhere, and elsewhere comes at a cost:

“Invoice financing is typically in the range of 6½ % to 8%, trade finance is typically 7% to 8 ½%, and overdraft facilities are typically 7 ½% to 9%”.

I’m prepared to stick my neck out here and suggest that finance provided to the mining companies would not be this expensive, so the finance risk has been transferred from the large company to the small.

Some mining companies will offer shorter payment terms in exchange for a discount on the invoiced price. I just can’t get over the feeling that this is inherently wrong. If you quote for a job and do the work well, you should be paid accordingly.

A national response?

Both Federal and State Governments are continually searching for and experimenting with policies to develop and sustain regional Australia. Every election, the regional airlines do a roaring trade as the fly-in, fly-out politicians do their obligatory media appearances in a hard hat or an Akubra. The Federal Government is even conducting a Parliamentary Inquiry into how the mining industry can help regional businesses.

Well here is a sure-fire way for Governments to boost regional development in the places where mining dominates the economy, and extended payment terms reign. Small Business organisations have been calling for payments terms reform for decades, and the Federal Government finally committed to 30-day payment terms for all contracts last year; 30-day terms now also extend through the entire supply chain for these contracts as well.

Now it’s time for other industries to catch up. Small Business must no longer be used as a source of credit by their big customers, and regional economic growth must no longer be stifled by the crippling effects of extended payment terms.

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  • Gary

    Thanks Bronwen, this is my life in small business now. I find the way in which large companies impose ‘payment terms’ – which are actually a bullying demand for credit – on small business, all the while lauding their CSR ‘credentials’, utterly reprehensible and the truth must come out. 90 days becomes 105 or more, to align with their ‘non-critical’ pay runs. And, procurement chiefs are incentivized on every day longer they can make their suppliers wait. I hope they choke on their bonuses! Moreover, many large companies cry crocodile tears saying ow much they support mental illness in the community. Utter BS! If they were serious about that they would ensure suppliers are paid on time and without resorting to a playbook of excuses not to pay!

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