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PAY HELP NEEDED FOR SMALL BUSINESS

February 04, 2020

Would it be fair to ask a small business to pay a $1000 fee so they could be paid on time?
 
Of course not. That, however, is the situation for many small businesses around the country who are caught up in the dodgy payment practice called ‘reverse factoring’ or ‘dynamic discounting’.
 
Stakeholders across the board are particularly concerned about the increasing prevalence of ‘reverse factoring’. Here in the West, the Labor Government is cracking down on the use of reverse factoring, putting a stop to WA Water charging suppliers to pay their invoices on time.
 
The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has launched a review of supply chain finance, and said, “it is totally unacceptable for big businesses to use supply chain financing arrangements as a replacement for reasonable payment terms being offered, 30 days or less from invoice”.
 
The Australian Accounting Standards Board is already looking into the “tiger trap” of reverse factoring and would be "discussing further with the International Accounting Standards Board and other relevant regulators".
 
The concerns I’ve heard about the use of reverse factoring led me to write to the ACCC in  October last year about situations where payment times are extended (even up to 90 days), and small businesses are offered a third-party financier to pay the invoice on time, but incur a fee.
 
If a large business agrees to pay a Small or Medium Enterprise (SME) in full and within 30 days, but supply chain financing is used for earlier payment, that’s fine.
 
Labor is concerned about contrived “reverse factoring” arrangements used by large businesses to obscure unreasonable payment times – sometimes 90 or 120 days - to small businesses. We are concerned that small businesses are, in effect, forced into such arrangements due to the power imbalance we all know exists between large and small firms.
 
The ACCC is now examining allegations about certain payment terms and its impact on small businesses and whether “certain agreements include unfair contract terms, or involve misleading and deceptive conduct.”
 
They have said, “We are aware that small businesses may feel they have little bargaining power when dealing with large customers, and that they must accept payment arrangements even where more favourable terms have previously been agreed.”
 
It seems pressure from Labor, the Australian Small Business & Family Enterprise Ombudsman, and the media  is paying off. Rio Tinto this week announced that it would abandon its use of reverse factoring.
 
Of  serious concern however is that despite the ACCC’s involvement and the clear cases of small businesses being ripped off by reverse factoring arrangements, the Morrison Government has vacated the field. 
 
Minister Cash needs to publicly lend her support to the review - but to date the Minister has been silent on the issue of reverse factoring.
 
The question here is why has the federal  government, who likes to talk a big game on small business, been conspicuously silent on this issue?
 
It is interesting to note that the senior strategic role at the billion dollar business, Greensill Asia-Pacific, which is built on “reverse factoring”, has been enthusiastically adopted by former Deputy Liberal Leader Julie Bishop.
 
Indeed, that business model has been successful enough that Chief Executive, Lex Greensill, personally discussed with the Prime Minister the possibility of expanding reverse factoring arrangement to people’s salaries, including public servants.
 
As a first and immediate step, Minister Michaelia Cash needs to publicly lend her support to the Small Business Ombudsman’s review of supply chain financing.
 
But beyond that, Minister Cash needs to ensure that reverse factoring cannot be used to obscure extended contracted payment times as part of its payment time transparency register for the largest 3000 companies.
 
The banking Royal Commission was a lesson on how our economy has become over-financialised. We’ve seen the problems that arise when needless intermediaries insert themselves into the arrangements of small businesses.
 
After six years of inaction, it’s time for Scott Morrison to stop the rortocracy he presides over, and help get the economy back on track by backing small business.

This opinion piece was first published in The West Australian on Tuesday, 4 February 2020.  

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