Multinationals accused of offering SMEs loans after extending their payment times to 120 days
Wednesday, April 5, 2017/
The Small Business Ombudsman says multinational corporations are fully aware that their payment terms can hurt smaller suppliers, and SMEs need to weigh up the costs of doing business with bigger operators in wake of revelations that international conglomerates are offering small businesses loans to help with cashflow at the same time as extending their payment windows.
Kate Carnell has told Fairfax her inquiry into payment times uncovered a number of cases where multinationals had offered small suppliers finance arrangements at the same time as extending their payment times up to 120 days.
Big businesses including Fonterra, Kellogg’s and Mars have been highlighted as offering finance arrangements to suppliers over concerns some multinationals are stretching payment times to up to 120 days.
Kellogg’s moved payment terms out to 120 days in the middle of 2016, at a time when data from the likes of Dun & Bradstreet pointed to historically slow payment times across the country.
Kellogg’s and Fonterra told SmartCompany this morning they don’t offer to set up small business loans but do have “supply chain finance” arrangements in place.
Fonterra says it has standard payment terms of 61 days, and offers supply chain finance to help suppliers with cashflow.
“Supply chain finance helps our business partners manage their cash flow by giving them the option of getting their cash earlier,” a spokesperson for the company told SmartCompany this morning.
Supply chain finance involves a business “selling” their invoice to a third party so that they receive payment either immediately or with a short turnaround, by agreeing to get paid at a discount.
“Our global payment terms have moved to 120 days, [and] as part of this new approach most of our suppliers are able to benefit from a supply chain financing model which means that they can access their payment in as little as 24 hours once approved. This helps businesses manage their own cashflow and in some cases, they benefit from better financing rates,” chief financial officer of Kellogg’s Australia and New Zealand Shanaka Wijesuriya said in a statement.
Mars confirmed to Fairfax it does have a “supplier finance program” that allows suppliers to access finance at “favourable rates”.
In a statement provided to SmartCompany this morning, Mars did not include information about this arrangement but said the business had “a spread” of supplier terms from 14 days, with 91% of suppliers being paid within 60 days.
Carnell tells SmartCompany this morning she had never heard of bigger businesses offering small suppliers loans before starting her investigation into payment times at the end of last year. She says it’s clear from stories SMEs have told her that big business know that lengthy payment times have an impact on cashflow, so multinationals are countering this by offering loan arrangements through their banks.
“We found out that an increasing number of multinationals, predominantly multinationals, but also mining companies and others, are going to 50, 90, 120 days,” Carnell says.
“What smaller companies are reporting is that big businesses are offering these loans facilities as part of these contracts when there are really really long payment times. They’re not saying ‘you have to take it’, they’re just saying, “if our payment times are going to cause you cashflow problems, we’ve organised a loan facility with a bank … because we’re such a good corporate’.”
Carnell says the phenomenon shows that lagging payment times in Australia are increasingly causing problems to the overall economy, stifling the ability of both medium sized and smaller operators to run their business because they are waiting on payments, while also driving up the actual costs of doing business through offers of loans to cover the gap.
“This is not just about one transaction, it’s about the problem that this stops investment,” she says.
“There’s a limited amount to what SMEs can do”
To Carnell’s mind, this situation is about more than just loans from big business or supply chain finance. It’s about the government having to consider measures to stop the domino effect of late payments overall.
“I suppose the message from us is these large companies have said to us, ‘all these decisions are being made in head office’,” she says.
“It’s the company’s policy that we’ll comply with the law — but if there is no law, then the decision will be for the company.”
While it’s likely that any loan offered by a multinational company to a smaller supplier through a bank could be brokered on better terms than what the supplier could otherwise get on their own, the reality is SMEs shouldn’t have to take out loans because of lengthy payment times, Carnell says.
However, given small businesses don’t have a large amount of bargaining power when dealing with big companies, all they can do is weigh up the costs of doing business, and steer clear of contracts that will actually end up costing them money.
“Have a look at the total cost of doing business — this has to take into account the payment terms, and potentially the cost of capital you might need to be able to deal with these people,” she says.
“It’s really important to have a look at the total cost. For many businesses, they have no choice, but there’s never a benefit in a contract that you lose money on.”
* This article was updated on Wednesday April 5 at 1:00pm to include comments from Mars.