I had a friend, many years ago, who ran a small graphic design business. Like most small businessmen, he put in long hours and continually struggled to balance money in and money out. Everyone who’s ever run a small business knows the routine: trying to make sure invoices were paid, and usually finding that all the money’s already spent by the time you get it.

It’s a fine line to tread and when a big invoice goes missing, it can be disastrous. This is exactly what happened to my friend: a big local business ran up a huge account, then simply refused to pay. When my friend gave up begging and cajoling and finally threatened legal action, Big Moneybags just laughed. “Go ahead, I can afford better lawyers than you.”

I’m sure everyone in business has a similar story to tell. One government agency is proposing a solution. “The disease of late payments has become an epidemic,” says Alan Kohler. “With large companies routinely screwing small suppliers because they can.”

Small Business Ombudsman Kate Carnell’s idea of standardising payment terms at 30 days for all businesses is a good one and deserves to be seriously looked at.

The trouble is she hasn’t yet taken the next step and recommended legislation. Her draft recommendation says: “The minimum standard for all supplier payments (regardless of supplier size) should be 30 days.”

So it should, but the only way that could be applied nationally, to all businesses, is through federal legislation, which would be a very big deal indeed – an almost unprecedented government intervention in the market. It’s implied in Carnell’s recommendation but should be explicit.

Some of Australia’s biggest businesses are already leading the way voluntarily.

In a way Telstra and Rio Tinto have merely highlighted the problem by moving to 20-day terms themselves, in Telstra’s case for invoices up to $2 million while Rio Tinto is doing it for companies with annual turnovers up to $10 million.

However, the problem remains huge – and a massive drain on the economy.

The supplier doesn’t have to be a very small business for there to be a power imbalance; larger companies in a competitive market can find themselves waiting 90 days for payment, with just as many problems funding the working capital as a small business[…]

In her report, Carnell says late payments by large business to small business account for 53 per cent of invoices. “This means that $115 billion worth of payments to small business are late and stops $7 billion of working capital being available to small businesses every year.”

[…]And what is happening with supply chain finance is an absolute scandal: big companies are routinely stretching out payments from 30 to 60 and 90 days and then offering to pay suppliers earlier in return for a discount on the invoice.

This is little more than extortion and should be prosecuted[…]There is clearly a role for the ACCC to look at whether there’s a misuse of market power, and also for ASIC, in whether supply chain financing should be a regulated financial product.

theaustralian.com.au/business/companies/government-must-legislate-on-payment-terms/

The question then becomes: is a problem that can be solved through ordinary processes? Or is legislative intervention warranted? Is this just more nanny-statism, or a necessary brake on powerful corporations distorting the free market and screwing over the little guys?

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