“Fundamentally flawed”: Big business manipulating BCA supplier code

insolvency practices

Small business ombudsman Kate Carnell. Source: AAP/Mick Tsikas.

Small business ombudsman Kate Carnell has called for a supplier payment code created by lobby group Business Council of Australia (BCA) to be scrapped, arguing the industry-based initiative is “fundamentally flawed”, allowing big businesses to manipulate terms and shirk their commitments.

Publishing initial results from its ongoing supply chain financing review last Friday, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has instead backed the Morrison government’s Payment Times Reporting Framework, currently in development, as a better vehicle to enforce reasonable payment terms for small businesses.

Taking aim at the BCA’s code ⁠— initially established in 2017⁠ as a voluntary commitment for large firms to pay small business invoices within 30 days back — ASBFEO said signatories are making use of varying definitions of small business, enabling them to limit the number of suppliers they’re required to pay within a month.

When the code was established a small business was defined as having fewer than 20 full-time equivalent employees (FTE) or less than $10 million in annual turnover, but after a 2019 review, the FTE requirement was dropped.

However, a grandfathering arrangement was brought in for big firms which had already signed, opening the door for manipulation.

“Even putting aside the issue of manipulation, the Supplier Payment Code is voluntary,” Carnell said in a statement circulated last Friday.

“There is no compliance monitoring and it’s actually unenforceable.”

Instead, Carnell has recommended the code by scrapped and replaced by a new framework being developed by Small Business Minister Michaelia Cash, which the government would be able to enforce.

“The fact is that all businesses, regardless of their size should be paid in 30 days,” Carnell said.

The BCA code covers about half-a-trillion dollars in revenue annually, including signatories such as Aldi, ANZ Bank, Australia Post, BHP, Bunnings, Commonwealth Bank, Coles Group and Coca-Cola Amatil, among many others.

But the scheme has long been criticised as enabling big firms to talk big about paying small businesses on time while sneakily extending terms with supply chain financing, or just not complying with their obligations in the first place.

The report comes as small business payment times become a hot-button issue in Canberra, following several ASBFEO inquiries which have found SMEs are waiting on average more than 30 days to be paid by big business partners.

Cash said last year it was “unacceptable” for large firms to be taking longer than a month to pay small business suppliers, particularly given the Morrison government has recently moved to 20-day terms, and signalled a further shift to five days.

More recently, several large firms have turned to controversial supply chain finance arrangements with their small business suppliers. One such program, known as reverse factoring, requires small firms to pay for faster invoice payments through a third-party financing partner.

Following an expose in The Australian in early-February, it emerged both mining giant Rio Tinto and Telstra were pushing supply chain finance arrangements on their local suppliers, although both businesses scrapped the plans and promised to move to 20 days in the wake of the reporting.

Carnell, who has been investigating the use of supply chain financing in Australia said Friday the use of the controversial arrangements is too common in Australia.

“Supply chain finance is a legitimate and effective tool that can be used to free-up cashflow for small and family businesses,” Carnell said.

“However, our review has found that too many big businesses have extended payment times and then offered supply chain finance.

“This practice severely impacts small business suppliers and is totally unacceptable.”

Carnell is due to hand down her final report into supply chain finance later this year, although the investigation has been hamstrung in part because Cash opted against referring the matter to ASBFEO, limiting its investigative powers.

A long-awaited official government response to an earlier payment terms review undertaken by ASBFEO last year has still yet to be tabled.

Carnell’s draft recommendations

  1. The definition of small business across government should be streamlined to a single metric or set of metrics.
  2. Enforceable payment times. Scrap the BCA code and replace it with the Commonwealth’s framework, which should be administered and enforced by a “proactive entity”.
  3. All supplier payments, regardless of business size, should be made within 30 days.
  4. Finance is a real choice. Supply chain finance should be available to small businesses to reduce payment times below 30 days.
  5. Accounting standards must be appropriate, clear and properly cover supply chain finance, ensuring accounts aren’t manipulated to mask cashflow issues and insolvency.
  6. The ACCC should review supply chain finance provider activity from a competition law standpoint.
  7. ASIC and Treasury should also probe whether supply chain finance should be regulated as a financial product.

The full Ombudsman’s report is available online.

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