The small business sector is well aware that big business has little regard for its cash flow problems. It also knows big corporations deliberately delay payments. The facts are in: SMEs are collectively owed $26 billion, according to a late payments study by PayPal and Intuit Australia in November 2015.
Nearly three-quarters of all business invoices are paid late, with payment terms extending to 61-90 days outstanding, rising by 22 per cent, according to the ACCC. The latest trade payments analysis from Dun & Bradstreet shows businesses are waiting an average of 44.9 days for payment.
Recent examples include cereal giant Kellogg's and New Zealand's Fonterra – both have now stretched their payment terms out to 120 days. Unilever and Nestle are already on 90 days.
So if these are the overwhelming facts, and nothing looks likely to change any time soon, what can small businesses do to rectify the problem?
Traditionally they have looked to debtor financing which encompasses two processes – factoring and discounting. In discounting, a financier will advance a percentage of the face value of a newly issued invoice. Factoring is similar, except the financier takes over the entire job of collecting on invoices, again deducting its fee from the repaid money.
One of the better known suppliers of invoice finance is Scottish Pacific, whose head of debtor finance Greg Charlwood says that as payment terms stretch out, it's a no-brainer to hand the problem over to experts. "I've never yet met a small business owner whose passion is following up unpaid invoices," Charlwood says. "Even if an invoice is only five days overdue, this equates to extra interest payments and it all adds up."
Innovation is changing this arena. George Papanikolopoulos, head of supply chain innovation at Timelio, is offering the big corporates a tech-based form of supply-chain funding designed to take the antagonism out of the payments process.
Timelio's technology is embedded within the company. When the corporate approves an invoice from any individual supplier, it takes on the invoice and with the help of investors pays the small business supplier immediately. "If Timelio gets a message from a supplier to pay an invoice on, say day 12, our system receives the signal and we pay it – the SME doesn't have to wait until day 60 or beyond," Papanikolopoulos says.
The system allows the supplier to have any percentage of the invoice paid upfront or the entire 100 per cent. Timelio has an array of investors willing to take on the risk, he says. "If it's a big corporate, the investors know they will eventually be paid on day 45 or day 60," he says. The cost of the service roughly equates to rates of 0.75 per cent of the total invoice per month – equivalent to a rate of 7.2 per cent to 9 per cent a year.
Even with new tech solutions, the onus remains on a small business to have their payment systems well organised – and aggressive. "The paperwork [you send to clients] must clearly state all relevant details, including customer order reference, date payment is due, your bank details, a full description of the goods
or services provided and a name and number of who to contact with queries," says Charlwood at Scottish Pacific.
CreditorWatch founder Colin Porter says small business operators need to be scrupulous about company identities – this means ensuring you have the correct legal entity matched to the credit application and ACN/ABN.
"You also need to check if you're dealing with a trust or a trustee," Porter says. "You may be trading with the trust, but if things go awry you'll be taking legal action against the trustees."
Porter says credit checks are advisable but the actual credit score is not always the full story. "Look at the full credit report and make your own decisions. When you're looking at bigger entities makes sure you have a copy of their financial report."
If you are a client of a credit reporting bureau such as his own, Porter also advocates being shameless about putting his or any other credit reporting bureau logo on invoices. "I know it's selling my own company's services but when companies see the logo, they tend to pay," he says.
Everybody seems to advise being tough with big companies and Damian Arena, managing director of cloud software company IODM, is among them. The company, whose software automates the process of getting paid, has estimated that for every $50,000 in outstanding invoices it can cost an extra $6250 in lost overdraft rates, forgone bank interest, tying up resources and lost opportunities. "We have one client tell us they spend the equivalent of $5800 in hours each month simply chasing debtors," Arena says.
While many software accounting packages automatically send out payment reminders to clients, IODM also schedules reminder texts and letters for invoices more than seven, 14, 21 and 28 days overdue on payment terms, and can automatically refer the debtor to a debt collection agency.
"Our research shows that 70 per cent of people act on the third reminder," Arena says.
"The point is, don't just accept payment terms bumping out to 60 or 90 days. Make your payment terms clear with clients when you start working with them, so they'll have no excuses when the deadline rolls around.
"Constantly review your debtors' ledger – the cash is better in your pocket than theirs."
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