Power play: How the big guys are making you wait for your money

The CEO was brutally honest in revealing how his multinational company uses its power to delay payment to its small suppliers. Unless there are laws to make them pay up earlier, small companies are forced to wait four months for their money, he said.

The business leader was explaining the policy of his overseas head office to Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, during her inquiry into late payments last year.

“I must admit I was just horrified”, says Carnell, who says a 30 day wait is acceptable business practise.

The CEO of the Australian arm of the multinational company said payment times were pushed out to 120 days. Says Carnell: “One guy [attending the inquiry] laughed and said, ‘You should consider yourself lucky, we have a 365 day payment contract in one country I know about’.”

“They said, ‘If there is nothing that makes us pay shorter, then we will pay longer. That is just the way we operate’.”

Carnell’s Inquiry into Payment Times and Practices uncovered a widespread exercise where big organisations are using small to medium sized suppliers as a cheap form of finance. By paying invoices months after products and services are delivered, large companies can improve the efficiency of their own working capital but, in doing so, starve their vulnerable small business operators of cash.

About half of the small to medium sized businesses surveyed by the inquiry say around 40 percent of invoices were paid late. According to Carnell, 90 percent of small businesses go broke because of cash flow issues and many try to tide themselves over with credit card debt and overdrafts.

Australia had the dubious honour of being the worst performer in global research on late payments by MarketInvoice in 2015, with settlement taking place an average 26.4 days after it was due.

Lending you the money they owe you

In a further development, interest bearing loans are being offered to suppliers who are waiting to get paid. Carnell has named Mars, Kellogg’s and Fonterra as three large companies offering this kind of supply chain finance.

These loans effectively levy a discount (the interest paid) on suppliers who cannot afford contractual waits of 120 days or more. “It’s pretty close to extortion really”, Carnell told the Sydney Morning Herald last year.

Another practise is to demand a discount from suppliers who want to be paid earlier than the contracted period – even though that period may be outside what is regarded as acceptable.

“There are two ways to do it. One is to require a discount, the other is to lend you the money at an interest – both of them are unacceptable”, says Carnell.

“You’ve got what is the essence of what could be regarded bullying, it is certainly using market power in an oppressive manner.”

Salt’s call for ‘same day pay’

Social commentator Bernard Salt recently called for “same day pay” in a column in The Australian newspaper, arguing that companies should not be buying products and services if they cannot pay for them straight away.

“There are 1.5 million small businesses in Australia. If you add in their partners, and staff and kids, then you are probably looking at four to five million people in Australia that are affected by timelines or otherwise of small business payments”, he says.

“The best thing you can do for small business is to pay promptly, on the day, same day pay. If you can’t pay for it, don’t buy the good or service.

“Refusing to pay in a timely and reasonable and fair manner is the equivalent of theft. I just cannot understand where people believe it is good or smart business practise. People might think it is smart, I think it is smarmy. If you incur a debt, you pay it and pay it promptly.”

Salt says he sees no reason why the flow of money is restricted to business hours, five days a week, when the rest of the world is operating 24/7.

“We should expect money to flow at the speed of data.”

Carnell says she is not demanding immediate payment … for now. “At some stage in the future, we think that is the way it should be. Right now, 30 days or less is reasonable”, she says.

Voluntary codes don’t work

To encourage best practise, Carnell’s office has set up the voluntary Small Business Ombudsman’s National Transparency Register. So far, around 21 organisations have agreed to report on their progress on paying promptly.

“It is a start, but it is a drop in the ocean really”, admits Carnell.

The Business Council of Australia responded to the inquiry by introducing its own voluntary Australian Supplier Payment Code, which commits signatories to 30 day payment times to small businesses and has around 77 signatories, but it has no requirement that companies report.

The NSW Small Business Commissioner, Robyn Hobbs, recently told ABC Radio that she does not think the BCA code goes far enough. “These things should be mandatory”, she said.

Carnell says her approach is to try a voluntary approach first, but admits she has little faith it will work.

“We looked around the world … and we hadn’t found a situation where a voluntary code had worked to create systemic change. The problem with voluntary codes is that the good corporate citizens sign them.”

People who think their own cash flow is more important than the economy won’t sign, she says.

“We would love a voluntary code to work because it would show that, as a nation, we do take good business practise, ethical behaviour, really seriously and we can make these things work without legislation. We will review it in 12 months and we would expect, if it had not been successful, that a Government would legislate.”

Governments set a standard

In the UK, the Government has introduced a voluntary Prompt Payment Code, working towards 30 day payment, and there is legislation requiring large businesses to publish details publicly of their actual payment times.

Governments can provide a good example to the commercial sector. A UK Central Government Prompt Payment policy seeks to pay 80 per cent of undisputed and valid invoices within five days.

The European Union has a Late Payment Directive setting a maximum payment time of 60 days, or 30 days for government, with an interest penalty, and ability to claim compensation and recovery costs. US government has QuickPay to reduce government payment times from 30 days to 15 days.

In Australia, Federal Government agencies have committed to paying small operators in 15 business days by mid 2019.

Some individual companies have also taken up the challenge since the inquiry, which reported a year ago. Since the inquiry, Mars has moved from 120 day payment terms to 30 days for small businesses. “That is a big step”, says Carnell.

Telstra has also “made a big effort”, reducing payment times from 45 days or longer down to 30 days or fewer for all its 7366 small business suppliers. The telco spends around $2.9 billion each year with small business suppliers.

“Those are the ones I know that have actually had to go through quite a lot of hassle to change their systems, it wasn’t a simple flick of the switch. The banks tell us they have moved to 30 days or less”, she says.

Woolworths and Coles have committed to paying small suppliers within 14 days.

“Some good things are happening, but it’s not enough, not nearly enough”, says Carnell.

Boards do not know if they are slow payers

Carnell has been in discussions with the Australian Institute of Company Directors about making payment times reporting a standard agenda item for board meetings.

“My experience as both a CEO and a board member, is that focusing the board’s mind on these sorts of things makes a big difference to corporate culture. Our experience, when talking to board members, is they have no idea how their company is operating in terms of payment times.”

A spokesman for the AICD says the organisation is promoting the code and the views of the Ombudsman to its members but cannot control what boards put on their agenda.

One entrepreneur has decided to take matters into her own hands, launching a “name and shame” platform for small business operators.

Frances Short launched the Late Payer List in March so that small to medium sized businesses could check the reputations of buyers or report cases where clients were too tardy or refusing to pay on invoices where there was no dispute about the work or products.

Short says she came up with the idea after watching her partner, a builder, continually have to chase payment, sometimes resorting to legal action.

Once when one client kept dodging a large payment, Short’s partner tried some social shaming. “He said to this guy, ‘I’m going to come down to your church wearing a sandwich board, telling your neighbours that you owe money and it’s not fair’.” The customer paid up.

“We want to do something for small biz that was much simpler, something that was socially powered and giving control back to small business owners, without the need for using expensive debt collectors or lawyers”, she says.

“What we have got is a bit of a nudge, nudge for late payers, so there is a consequence.”

The Ethics Alliance collaborated with members on a new procurement research paper for making ethical payment easy. Download your copy here.