A report on over 150,000 Australian small businesses has shown late payment times to be a $7 billion problem significantly slowing the growth of local SMEs.
The report, from accounting software provider Xero, analysed over 10 million invoices issued by Australian small businesses and extrapolated the payments patterns to apply to large Australian businesses.
Of all trade between small and large businesses from July 2017 to July 2018, an estimated 53% of invoices were paid late by big businesses.
On average, businesses not being paid on time found payments were 23 days overdue.
That 53% equated to a whopping $115 billion of late payments and Xero estimates if those invoices were paid on time by big businesses it would transfer an additional $7 billion of working capital to small businesses each year.
“Late payments are the scourge of small business, and being able to name the staggering figure of $115 billion for the first time gives fresh urgency to solving the problem. We call on big business and government to prioritise this issue,” Trent Innes, Xero managing director said in a statement.
Businesses in the hospitality sector were paid the quickest at 18 days, where businesses in the wholesale trade sector were paid the slowest, with an average of 35 days.
Xero’s report also found a direct correlation between small businesses being paid late and the revenue growth of those businesses, with those waiting for payments growing one-third slower than those paid faster than average.
Much of this data lines up with data from the report completed by Australia’s Small Business and Family Enterprise Ombudsman (ASBFEO) in April, which revealed SMEs were paid in 37 days, on average.
Speaking to SmartCompany, small business ombudsman Kate Carnell says the figure from Xero matches what her office had uncovered, with late payment times being the second biggest issue for Australian SMEs after access to capital.
“What small businesses are telling us is if they were paid on time or in 30 days or less, they would be in a significantly better place to grow and invest,” she says.
A boost to the economy
Solving the payment time epidemic would deliver an additional $2.54 billion to the Australian economy over the next 10 years, Xero estimates, and Carnell says she also believes it would make a “huge difference” to the economy.
She also agrees late payment times are slowing the growth of small businesses, with business owners lacking the confidence to invest in growing their business.
“Business owners having to check bank accounts every evening to see if money has come in or not is getting in the way of them investing. When they know when money is coming in, they have the confidence to hire more staff or buy more equipment,” she says.
“You don’t have to be Robinson Crusoe to know that you can’t invest if you’re not being paid.”
Last year, the Government pledged to revamp how it would deal with big businesses seeking government tenders, forcing them to commit to paying small businesses within 20 days if they want lucrative Government contracts.
It also pledged to cut its payment times from 30 to 20 days for invoices under $1 million by July 1, along with investigating frameworks to force big businesses to report their payment times.
“We have listened and we heard loud and clear from small business owners around Australia, and we are taking action to ensure small business is not being used as a bank,” Prime Minister Scott Morrison said at the time.
“Small businesses are the backbone of our country and they need to get a fair go.”
Carnell says while naming and shaming big businesses is a strong approach, she says if it fails to move the needle on payment times for SMEs, she’d push the government to introduce legislation.
“We’re making some small improvements, but the dilemma is that lots of big companies are just doing it because they can, and that’s slowing down the economy.”