The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) conducted a nationwide consultation of small businesses in 2016 to build a better picture of what issues affect their success in Australia today. The results revealed a worrisome trend: Big businesses are paying their much smaller counterparts increasingly late, and it’s those small businesses that are forced to pay the price.
To investigate this issue, the Ombudsman has launched the still ongoing Payment Times and Accuracy Inquiry, to determine the extent of the problem, and come up with ways to properly address it. The inquiry will culminate in the presentation of a final report to the Minister for Small Business in March 2017.
What the inquiry has found
Some early findings have already been released by the ASBFEO, and revealed that late payments have become epidemic. Fully half of Australian small businesses experience late payments on at least half of all bills owed to them by volume. Not only that, this practice of paying late is becoming more widespread among powerful corporations. 60% of the businesses surveyed have indicated that more clients are paying late, and that they’re paying increasingly late.
This practice is having serious effects on both the affected businesses, and the business owners who operate them. Business owners are forced to cope with increased stress and anxiety related health problems, and 70% indicate that late payments have negatively affected profitability and cash flow. At any given time, small businesses are owed about $26 billion in unpaid debts, interfering with their ability to grow and operate effectively.
How do big businesses benefit?
Large corporations may be attempting to stretch out late payments deliberately to effectively give themselves loans at the expense of their suppliers. Paying late temporarily gives them access to more total capital, which they can ostensibly use to generate more wealth. Additionally, they may be able to force the smaller partner to settle for partial payment at some point in the future.
They can do this because of the inherent power imbalance between large and small businesses. Smaller businesses often rely on big contracts from much larger clients for their survival, allowing the bigger partner to effectively dictate unfavourable terms to them. Not only that, but smaller businesses are often under such pressure to maintain a good relationship with those clients that they don’t retaliate when clients don’t even meet those unfavourable terms.
What’s does this mean for small businesses?
Small businesses have it tougher than most, and things are getting worse. Late payments and stretched out payment terms can cause dangerous cash flow interruptions, which weakens established small businesses and prevents others from pursuing growth opportunities and developing robustly. This shifts the balance of power even further, making those businesses even more dependent on those big contracts for their continued survival.
This creates a potential feedback cycle that can ultimately lead to fewer small businesses overall, replaced by fewer, large businesses.
The Australian economy needs these small enterprises to thrive. Small businesses provide 4.8 million jobs in Australia, and comprise 97% of all the country’s businesses. These jobs are the backbone of the middle class in any economy, and need to be protected. Even if the jobs lost were replaced by larger businesses, it would create a weaker system overall.
A large incumbent industry leader might view less competition as a positive thing in the short term, but eventually the cost of doing business would increase for everyone. Big businesses may not realise it right now, but they need small businesses too. Many independent businesses work together to create a competitive environment that benefits everyone. Fewer businesses make industries less competitive and less efficient in the long run.
What Australia can do
Both legislative and voluntary changes to the status quo may be called for to create a fairer arrangement for small businesses. Other solutions have already been implemented to address similar issues elsewhere. The EU has a legal directive requiring member states to address late payments, while the UK is implementing a requirement on big businesses to report on payment times and practices.
To complement these actions directed toward big businesses, the inquiry will also look at options that could help small enterprises to improve their cash flow management through the use of financial technologies, education, and improved communication.
These businesses need to be supported and protected to ensure the healthy long-term function of any economy. The ASBFEO’s inquiry is a highly promising first step by the Australian government on behalf of the country’s 2.1 million small businesses, and the results of this action may pave the way for a better and more robust business environment for everyone.