The warning comes from accounting software firm Xero which says the “astronomical” levels of debt has brought a call from 86% of SMBs recently surveyed for the federal government to do more to fix the problems of late payments.
According to Xero, the survey of more than 500 Australian small business owners and managers found nearly four in five (79%) supported a government-backed policy to shorten the time it takes big businesses to pay small businesses.
And the majority of small business managers surveyed said they also want to see the government encourage a fairer system for small businesses to compete with big businesses for contracts (84%), and level the playing field with big businesses (70%).
And according to Xero, the findings provide the strongest support to date for a payments code aimed at solving the cash-flow gap between big and small businesses in Australia, ahead of an anticipated report into the payment times by the Australian Small Business and Family Enterprise Ombudsman.
While most small businesses have payment terms of 30 days or less for their suppliers, the survey reveals that many big businesses mandate terms of 60 or more days, with some refusing to pay faster than 120 days after invoice, according to Xero.
Xero Australia managing director Trent Innes says red tape is often acknowledged as the scourge of progress, and the same is true when it comes to big businesses paying small business – with ”process” touted by small business as the most common reason for late payment by big business (83%).
“In our experience, increased regulation and red tape do as much harm as good, particularly when the increased burden on small businesses is taken into account,” Innes said.
“Rather, we’re looking to the government to bring about non-legislative measures that foster and encourage big businesses to do the right thing, and pay fairly.”
According to Xero, an analysis of the company’s combined invoice statistics found that, over the past six months, one in five invoices payable by ASX 200 companies to small businesses had been overdue by more than 30 days, with more than 3.8 million invoices currently overdue to small businesses on the Xero platform around Australia.
And, most small businesses that took part in the study (84%) said that big businesses had too much negotiating power, and as a result were found to “suffocate small business cash flow, while facing few consequences”.
The consequences for small businesses, however, are critical, Xero says, with almost half (49%) of businesses saying that late payments hinder growth, while 34% could not purchase more equipment and one in five could not hire as quickly as they needed to.
Xero warns that, most critically, poor cash flow could put a small business’ solvency at risk.
“Our study found that 6 in 10 small businesses would not survive more than three months if all invoices went unpaid. Some 6% of businesses wouldn’t even last a week,” Innes said.
“While the upcoming payments inquiry hints at possible governmental intervention in the near future, small businesses need viable solutions now.”
According to Xero, small businesses are turning to technology in order to get paid faster, and to bridge the cash-flow gap.
Around two thirds of businesses (63%) are using technology and software to monitor and manage payments while the same amount now offer customers an option to pay online, with the most popular options including PayPal, BPAY and mobile payments.
Xero maintains that the impact technology is having on payments is, “in the eyes of Australia’s small businesses, overwhelming”.
According to the survey, almost every business offering one of these online payment options (95.3%) says technology methods are “very” or “somewhat” effective in reducing late payments, while another 59% of businesses said allowing online invoicing is a major solution to late payments.
“We use technology to make pretty much every part of our lives easier, and business payments has finally caught up,” Innes said.
“While technology provides a good solution now, Australia’s small businesses need — and want — to see the government fighting their corner.”
And, technology plays a role for many small businesses when attempting to get paid faster. However, there are still around 37% of small businesses not implementing these solutions that are finding payment terms getting stretched further.
Xero says late payments create a domino effect among small businesses, increasing the impact on the economy. Small businesses acknowledge that their biggest cash flow concerns due to late payments are ability to pay suppliers (38%), the ability to pay staff (15%) and declining profitability (24%).
“We’ve seen some big businesses improve their payment terms in recent months. However more still needs to be done. The conclusions from the payment inquiry will likely act as a catalyst for change, with more big businesses moving away from restrictive payment terms,” Innes says.