By Alexi Boyd, Small Biz Matters 

The concept of “payment terms” seems to be confusing for big business in Australia. I am of course talking about the situation that small businesses face daily: struggling to get their invoices paid on time for services or products they’ve delivered. This struggle is well documented in Xero’s special report, “Paying the price: The economic impact of big businesses paying Australian small businesses late.”

It’s bad enough that large businesses often dictate long payment term to small businesses, such as 60 or 90 days after an invoice is received. Small business owners are all too familiar with the multi-page “supplier agreement,” a document which they really have no choice but to sign. Australia’s 2.2 million small businesses essentially provide a free money market for big businesses: no-cost loans of 30 to 90 days, plus the added bonus of earning interest on money that isn’t yours!

Protect yourself

Compounding the problem of unreasonably long payment terms is the common experience of getting paid late on top of those terms. And the reality of complaining about late payments is that you often cannot complain and, thanks to the supplier agreement, have little recourse.

The good news is there are actions you can take as a small business to protect yourself:

  • Set up concrete payment terms on invoices, estimates and quotes that clearly state interest costs, late payment fees and indicate this to a client the first time you engage. If you have an engagement letter that should clearly state these too
  • Ask for a 50 percent up-front payment to cover your costs
  • Set up automatic invoice reminders with your accounting system to remove the administrative burden of chasing non-payers. Consider sending a friendly reminder a few days before your due date in addition to follow-ups once an invoice is late
  • Check in with your professional association for advice on industry standards of payment terms for your profession.
  • Consider offering discounted terms for early payers
  • Remember, when the client signs your documents, they are agreeing to your terms and conditions. And remember that you do have rights as a small business through legal action. But make sure you’ve crossed all the t’s and dotted all the i’s when it comes to your correspondence.
Counting the cost

So, what is the real-world cost of late payments? Well, thanks to the use of big data in Xero Small Business Insights’ latest report, Counting the cost, we now know that over half of invoices are paid late to small business. And not just a little late – they are paid an average 23 days after the due date, to the tune of $115 billion. That’s a lot of money sitting in the wrong business’s bank account, earning interest.

I’d like to say this is simply a problem for the affected business owner, but this impacts innocent bystanders. Xero data shows that small businesses which wait longer than average to be paid tend to pay their own suppliers eight days later than small businesses which are paid sooner than average. The trickle-down effect, in particular for consultants or sole traders, can be crippling.

It’s encouraging that, starting this week, the federal government will commit to paying supplier invoices within 20 days for services valued at less than $1 million. And in New South Wales, that time is going to be reduced to five business days, which is even better. But a pledge by government may do little to change big business behaviour.

That’s why we at the Small Biz Matters radio have been advocating for small business by asking the government to make it mandatory for all large businesses to pay when an invoice is due. This would be more effective than proposed approaches, such as Small Business Minister Michaelia Cash’s suggested Payment Times Reporting Scheme. This scheme would “require businesses with a turnover of more than $100 million to publish how and when they pay their small business suppliers and contractors.”

Immediate benefit

This is a great first step, and there are some excellent consultation panels underway on how to make this work. But the question is, how useful will it be to know in advance that a large client is likely to pay late? Small businesses often can’t afford to be choosy about potential clients and have scant time to trawl through a government report to check whether their prospective client is compliant.

Wouldn’t mandatory payment times — as opposed to reporting — have an immediate benefit for all of us? If small businesses are truly are the engine room of the economy, wouldn’t this turbo-boost their cash flow and spending, and encourage them to meet their employer obligations. Maybe even boost hiring?

Mandatory reporting of big-business payment times and government payment pledges will help. But many of the small businesses I talk to would like to see strong legislation that enforces the payment terms to which the supplier and the client agree.

Let’s hope the government recognises the problem and makes payment times a priority, for the sake of Australia’s 2.2 million small businesses.

The above article represents the opinions of the guest contributor and does not necessarily reflect the views of Xero.

Alexi Boyd is an interviewer, panel moderator and radio broadcaster of Small Biz Matters, a radio show on community radio Triple H 100.1 FM. It is dedicated to advocacy, support and providing excellent small business education through unedited long-form interviews. Small Biz Matters’ podcast features interviews with experts, industry leaders and government officials from the ATO and ASIC, and can be found on iTunes and at Small Biz Matters