Getting paid has turned into a massive $776 billion problem for small business that’s getting worse due to covid-19

- April 20, 2020 4 MIN READ
Photo: AdobeStock
The time taken to pay small businesses has blown out in the wake of the coronavirus crisis, leading to the SME sector to call for federal legislation to ensure they can manage their cash flow effectively.

Research commissioned by financial services firm Scottish Pacific found businesses with an annual revenue of $1-10 million have been hardest hit by delays, waiting on average 66 debtor days. Scottish Pacific CEO Peter Langham said the overall SME average is 56 days, while larger firms larger firms with $10-20 million in revenue are waiting 40 days to be paid, but as the survey was conducted prior to the covid-19 pandemic hitting business, its impact is highly like to be dragging payment times out even further.

More than 1200 SME owners or senior finance staff, and found the range of payment times (debtor days) varied from 7 days to more than 4.5 months – 134 days.

Langham said there “is a great disparity” in how quickly a company is paid, with size making all the difference – the bigger you are, the sooner the cash comes in.

“Money that could be used to expand revenue and invest in growth is being tied up for too long, as SMEs struggle to be paid within a reasonable timeframe,” he said.

“This is a significant burden to bear and reinforces the importance of reducing payment times, in particular for SMEs struggling to source new funding or to refinance their existing borrowings.”

On average, the research found that SMEs have almost a third of their revenue (29%) tied up in outstanding invoices, with 16% of revenue locked into overdue invoices (outstanding beyond 90 days).

That finding applied across SMEs in the $1-10 million and $10-20 million revenue ranges.

The average turnover of survey respondents was calculated at $9.8 million,  meaning each SME in the cohort is trying to deal with, on average, $2.82 million in outstanding accounts receivable.

That then translates into the SME sector (with $1-20m revenue) having up to $776 billion annually in outstanding total invoices. That’s 3.5 times bigger that the Morrison government’s massive economic stimulus plan trying to keep the Australian economy afloat during the covid-19 shutdown.

Langham said each SME has to manage having, on average, $1.55 million in invoices that are not just outstanding but overdue (defined as beyond the 90-day mark).

“At the extreme, some small businesses are waiting up to four months to be paid and almost one in 10 SMEs can’t state their average debtor days, with some struggling to calculate the figure because invoice payments are too variable to reliably report,” he said.

Scottish Pacific, Australasia’s largest non-bank SME funder, including the startup sector, has partnered with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to create a free downloadable Business Funding Guide for business owners

“Poor cash flow is costing businesses time and resources to settle invoices that for some enterprises stretch out over an entire financial quarter, when it would be of more benefit for the SME sector, and the economy in general, if they could use these resources to expand revenue and invest in growth,” Langham said. 


30-day payment limit

ASBFEO boss Kate Carnell today called for federal legislation requiring small businesses to be paid in 30 days as a key recommendation in her organisation’s final report for the Supply Chain Financing Review.

Carnell said it was “unacceptable” that large businesses were extending and sometimes suspending payments to small businesses as a response to coronavirus.

The Supply Chain Financing Review cites several household-name companies with payment policies that are damaging to small business suppliers, including retailers MYER, David Jones, Just Group and Sussan Group, as well as Carlton United Brewery and the country’s biggest construction company CIMIC.

“There’s no denying businesses of all shapes and sizes are enduring extraordinary challenges as a result of the Coronavirus crisis, but small businesses are being hit hardest,” Carnell said.

“Legislation requiring SMEs to be paid in 30 days is the only way to drive meaningful cultural change in business payment performance across the economy.”

While the registrations for the government’s $130 billion JobKeeper stimulus package opened today, giving eligible companies $750 a week for every employee they keep on the payroll, Carnell said many small businesses have been forced to close their doors and a lot may not survive the coming months, even with significant support from the government.

“We know that if small businesses are paid on time, the whole economy benefits. On the flip side, a lack of cash flow is the leading cause of insolvency,” she said.

She pointed to legislation in the UK that stipulates a uniform 30-day statutory limit for payment of invoices, with financial penalties for late payments. Carnell said the review found that the voluntary Supplier Payment Code was not effective.

“There is no compliance monitoring and it is actually unenforceable. This is consistent with similar systems internationally,” she said.

“While we support the Payment Times Reporting Framework as a useful tool, it’s unlikely to result in the systemic change that is needed.”

CreditorWatch CEO Patrick Coghlan said it was a tough time for businesses no matter their size, but delaying payment was not a solution.

“We all need to be sympathetic to the efforts that many are taking to preserve their businesses,” he said.

“Whilst delaying payments to small businesses might help cash flow in the short-term, long-term this isn’t viable. The chain reaction we will face if small businesses aren’t paid on time could be astronomical and default payments in the small business economy will eventually lead to issues higher up the ladder. ”

Guy Saxelby, co-founder and CEO of Earlytrade agreed with the Ombudsman on making 30-day payment terms legally binding.

“We believe this will help all business during a COVID-19 downturn. There isn’t any excuse for this. With the right tools, any major company can pay their suppliers within 30-days,” he said.

“Our only issue, however, is that this payment term law should be limited to small business, as its where the funds are needed most. Legally, there are many definitions for this that may need to be clarified ahead of a law being put in place.