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Late payment rates are three times higher for SMEs, CreditorWatch data shows

Recent data from CreditorWatch has revealed that small businesses face an uneven burden of late payments, with rates on average three times higher for small businesses than their larger counterparts. 

This discrepancy highlights the difficulties small businesses encounter when it comes to enforcing payment terms and collecting payment arrears, as well as the tendency of some larger businesses to use smaller suppliers as interest-free banks.

According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), a significant proportion of large businesses are taking more than 120 days to pay small business customers, which can have severe consequences for cash flow and overall business operations.

In contrast, only a fraction of large businesses pays within the first 30 days, a timeframe that is considered reasonable for payment. This imbalance in payment terms poses a considerable disadvantage to small businesses in the marketplace.

Late payments can result in serious financial ramifications for small businesses, such as reduced cash flow, increased debt, and even insolvency. The impact can also affect suppliers, staffing, and customers. As small businesses typically operate on tight margins, a delay in payment can cause a ripple effect that can be challenging to recover from.

The power imbalance that exists between large and small businesses may contribute to the discrepancy in payment terms. Large businesses often hold more bargaining power and can dictate payment terms that may not be in the best interests of their suppliers. This can create a situation where small businesses are compelled to accept late payment terms to secure lucrative contracts or maintain ongoing relationships with larger customers.

To address this issue, small businesses need to be proactive in enforcing payment terms and collecting payment arrears. This can involve building strong relationships with customers, setting clear payment terms, and following up on late payments in a timely and professional manner. If payments are significantly overdue, seeking legal advice or engaging a debt collection agency may be necessary.

Late payment rates are three times higher for SMEs, CreditorWatch data shows

In addition, governments and regulatory bodies can help support small businesses by introducing legislation and policies that promote fair payment terms and address power imbalances between small and large businesses. These measures could include mandatory reporting of payment terms and times, penalties for late payments, and support for small businesses to access alternative financing options. By working collaboratively, small businesses, governments, and larger businesses can create a more level playing field and a fairer marketplace for all.

Patrick Coghlan, Chief Executive Officer of CreditorWatch, said, “Small businesses are already tackling high inflation, high-interest rates, supply chain issues and labour shortages, and the last thing they need right now are lengthy payment delays.  

“Businesses need to ensure they are getting paid on time to ensure they can pay their own liabilities and have sufficient working capital to maintain their operations and grow. With fewer resources at their disposal to collect and chase payments, small businesses should consider automated credit risk management solutions that can help reduce incidences of delayed payments.”

Bruce Billson, Australian Small Business and Family Enterprise Ombudsman said, “Nearly one-quarter of big businesses taking four months or more to pay their bills is just not acceptable, and there is little sign of improvement by the worst performing businesses. 

“This needs to be taken more seriously. Finance is the oxygen of enterprise. Cash flow is vital to these small and family businesses. There is abundant scope for big businesses to lift their game, and they should.”

Access the latest insights from CreditorWatch here, and subscribe to the Business Risk Index to be the first to receive our monthly updates.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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