Enforced reverse factoring models are severely impacting SMEs

Last week the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell released their preliminary findings on the impact of supply chain financing (SCF) on the SME sector.

The review was in response to concerns over the increasing number of big businesses using SCF (as a method of reverse factoring) as a way not only to push out payment times to their suppliers – but sometimes as a way to add extra revenue to their bottom line.  For example, before backing down from the scheme, Telstra reportedly received a $550m boost from implementing a reverse factoring model – a claim which has been disputed by Telstra.

The issue of late payments for small businesses is a serious one.  Ms Carnell states in the report “$115 billion worth of payments to small business are late and this stops $7 billion of working capital being available to small businesses every year.”

Our view is that getting working capital back into a business sooner makes sense for any SME.  When it is by choice, using an invoice finance (or SCF) facility helps businesses take better control of their cashflow.  They are happy to offset the cost of a facility against the value of receiving funds when they need them.  However using a finance facility of any type should be the decision of the business taking it on.

The problem with SCF arises when big companies force their suppliers to use a facility simply to get paid within a reasonable timeframe; or when they prohibit businesses from using any other type of facility.

As the Report states:

(Supply chain finance) is a legitimate and effective tool to free-up cash flow. for small and family business. We have spoken to small businesses that have used SCF to great effect to reinvest in their business and scale rapidly…. But the Review has found that too many big businesses have extended payment times and then offered SCF. This practice severely impacts small business suppliers and is clearly unacceptable.”

Over the last few days we have seen business giants Telstra and Rio Tinto begin distancing themselves from their reverse factoring or ‘Dynamic Discounting’ schemes after widespread criticism.

However, the only way we may potentially see real change is likely to be through new laws.  Last year Small Business Minister Michaelia Cash stated that is “unacceptable” for big businesses to take longer than 30 days to pay SME suppliers when the government had adopted a 20-day timeframe.

In the coming months, the Government will introduce legislation that will require Australian businesses with an annual turnover of $100 million or more to report how and when they pay their small business suppliers.  Although the definition of ‘small suppliers’ continues to be problematic.  Following the passing of this legislation, the Payments Transparency Register would be in place by January 2021.

We are yet to see the full outcome of the ASBFEO’s review and indeed the Payments Transparency Register coming to fruition.  The certainty we do have though is that we operate in a very fast paced industry with new platforms aimed at aiding the competitiveness of small businesses growing.

For us, the core of successful business is relationships, built around trust, respect and responsibility.  There is no place at the table for a few giants squeezing the futures from our SMEs and we applaud the moves being taken by Ms Carnell and others to protect them.

For more information on how an invoice finance facility can help your business work better with big business download our guide here.