Business

Govt tackles big businesses that won’t pay their bills on time

The Government says it wants to protect small businesses from getting shafted by big companies who don’t - or won’t - pay their bills on time. The move can’t come too soon. 

For about a year in 2012 and 2013, Stuart Nash, now Minister for Small Business and for Revenue, found himself on an unplanned “break” from politics. 

He started his own company, Stuart Nash Consulting, offering public and government relations, and help with strategy and marketing.

It was kinda fun, he says; he enjoyed the “business of business”.

What wasn’t fun was trying to collect money from customers, often big companies or government departments, who just wouldn’t pay their bills on time.

He remembers one particular large government organisation.

“They were meant to pay on the 20th of the month following, but the money didn’t come in. I would call them on the 21st, the 22nd. ‘Oh yes,’ they’d say, ‘the money will be there on Friday’. But it wasn’t. I was always phoning the bank. ‘Please don’t bounce my mortgage, the money’s coming in’.

“It was such an imbalance of power. I needed to get the money but I was worried if I hassled them too much maybe they wouldn’t continue to give me work.”

Small Business Minister Stuart Nash has personal experience of waiting for big organisations to pay their bills. Photo: Lynn Grieveson

Stuart Nash Consulting doesn’t trade any more. Nash won the Napier seat in 2014 and went back into politics.

But he recognises his experience as a small business owner is far from unique. Large organisations using their SME suppliers like de-facto banks - holding on to payments for work or goods received for as long as possible to boost their cashflow - is a well-known tactic worldwide. 

Xero’s Small Business Insights data suggests small New Zealand companies on its platform were paid 8.6 days late on average in 2019. At any one time, small businesses are owed $7.4 billion in unpaid invoices. 

Pick any day and the average owed to every small business is $7000. 

“It’s an emotional issue,” Xero’s managing director New Zealand and Pacific Islands Craig Hudson tells Newsroom. "Cashflow is the number one killer of small business; the majority of businesses in New Zealand are sole traders and live hand to mouth. When you have under 20 employees and a big customer is dragging out terms, you feel you cannot push back and demand your money. You need the business.”

Trouble is, getting paid on time can be the difference between success and failure for some companies. Certainly between growth and no growth, between enjoying running a business and being unhealthily stressed. 

And often the first thing an SME owner does when cashflow is tight is not pay themselves, Nash says. 

A survey of 1000 small businesses in the UK found more than a third of owners had sacrificed their own salary because of late payments.

Tackling the problem

This week Nash, with his Small Business Minister hat on, published a discussion document with two proposals he hopes will clean up unfair business-to-business payment practices.

The first: legislate for a maximum 20-day payment term. Second: give businesses the automatic right to charge interest on late payments, including making sure the interest rate they can change more accurately reflects the true cost of late payment. The discussion document suggests using the Reserve Bank’s six-month term deposit rate plus five percentage points, but Nash is looking for feedback on all the proposals.

In the future, the Minister could look at alternative dispute resolution mechanisms and at forcing large companies to publicly report on their payment times, the proposal says.

Change can’t come soon enough, says small business owner Jane Ward. Her company Tomorrow’s People provides technology consulting services to support human resources systems. It has 10 staff.

Clients include some of the largest companies in New Zealand, Ward says. Big home-grown companies and the local arms of huge multinationals. Companies you would have heard of; companies with enough money in the bank to pay a $5000-$20,000 invoice.

“Last month [January 31] we sent out 15 invoices, payment 20th of the month following. Only seven companies paid on time.”

In November last year, not a single one of Tomorrow’s People's invoices were paid on time

Ward does the follow-up calls herself - every month. She’s a small business; she doesn’t have an accounts department to send out reminders, just a part-time bookkeeper. 

As of a week later, February 27, when Newsroom talked to her, three more customers had paid up. Five still hadn’t. Ward hopes they will by the end of the month - maybe early March. 

“There’s a huge impact on my business. You are relying on people paying on time to pay staff, pay rent, grow the business. But planning ahead is nearly impossible if you can’t rely on income coming in regularly.”

The business is going well, Ward says, but a couple of times she has had to borrow from her personal bank account just to meet payroll; on other occasions she’s used a cashflow finance company - the sort that lend money on unpaid invoice books - to see her through a difficult patch. But that comes at a cost. 

In November last year, not a single one of Tomorrow’s People's invoices were paid on time, Ward says.

“There seems to be an attitude of not paying on time - businesses don’t seem to be concerned about it. You rarely get an apology. If I ring up and say I’ve not been paid, they say ‘I’ll find out about it'. There’s no ‘Sorry about that’, no ‘I’ll get it through to you overnight.’ They say it’ll come through in a week, in two weeks, in the next payment cycle. 

“It’s as if that was totally acceptable.”

Is it deliberate?

Nash and Hudson reckon sometimes the reason big private or public organisations aren't paying their SME suppliers is just slackness. Accounts payable departments are under-staffed or overly bureaucratic, payroll systems don’t work well, and invoices from small, unimportant suppliers get put at the bottom of the pile. 

But that’s not the whole story. Increasingly, big companies are adopting late payment as a deliberate business strategy. Terms of 60, 90, even 120 days are being written into contracts for small suppliers. 

Take it or leave it.

European spirits company Diageo, food giants Mars, Heinz and Kellogg, and consumer goods multinational Proctor and Gamble have all been named in the media for extending their payment terms to between 60 and 120 days.

Fonterra adopted the strategy in 2016, delaying payments to small suppliers like tradies for up to three months.

This amounts to big companies using their small customers to maximise their use of capital. If a big company's customers pay them on delivery (or soon after), but they hold off paying their suppliers for 90 or 120 days, that’s three or four months of cash they have to use for other projects.

Cunning, eh?

Oh, and then that same big company can “generously” offer to pay its suppliers' bills on time - if they give them a discount. Apparently that sort of thing happens in New Zealand all the time.

The other option is when the large customer arranges for its unpaid suppliers to get finance from a third party to cover them for the extended time they are waiting for payment - for a fee. It’s known as supply chain financing  and like the enforced discount option is promoted as being in the best interest of the suppliers.

Yeah right.

Fonterra reversed its late payment decision in April 2018 after pressure from Stuart Nash.

“One of the first meetings I had when I took over the small business portfolio was with Fonterra,” he tells Newsroom. “At that stage they had up to 120 day terms. I told them ‘Come on guys’.”

He also made sure to include a Fonterra representative when he set up the Small Business Council, he says.

Nash and the Inland Revenue Department have also been key in trying to get the Government to pay its own SME suppliers on time. He’s working with 34 core government agencies with a target of them paying 95 percent of domestic invoices within 10 working days by June this year.

Ironically, the Ministry of Business, Innovation and Employment, which published the late payments discussion paper, used to be one of the worst offenders, Nash says.

“People were forever chasing MBIE. Now they are paying 75 percent of their invoices within five days and 95 percent within 10 days. If MBIE can do it, everyone should be able to.”

Xero research found NZ small businesses are owed $7.4 billion in unpaid invoices. Photo: Lynn Grieveson.

But is that enough?

Xero's  Craig Hudson is pleased the Government is moving on late payments, both in the public and private sectors, but reckons Nash could do more. 

The Australian government announced in November last year it would pay all SME invoices under A$1 million within five working days - as long as they were submitted electronically.

“Over 50 percent of small businesses fail because of poor cash flow,” Hudson says, and the stress caused to small business owners from not being paid on time is “immense”.  

Last year, Xero did research in the UK and published a blog called “The human cost of late payments”.

It found:

- More than 40 percent of small and medium business-owners say late payments have affected their mental health. 

- 43 percent say they’ve been unable to sleep because of worrying about their business’ cash flow. 

- 45 percent of SME owners feel they’ve failed their companies when they’re cash flow-negative. 

- 37 percent of entrepreneurs have considered quitting their business because of cash flow issues.

They said ‘These are our terms and if you don’t accept them you won’t get our business’.

It’s a problem technology journalist Bill Bennett understands all too well. In 1989 he set up a trade and technology publishing company, Ariel Publishing, funded largely by advertising. The company folded five years later, not because it wasn’t profitable - it was - but because big companies didn’t pay their invoice and eventually cashflow caught up with them.

He doesn’t want to point the finger - most of these big companies are still going today, and Bennett is still in the business. But he’s bitter about how the advertisers, mostly local branches of big multinationals treated Ariel Publishing “like a bank”.

“When we closed the business, the receivables file was worth more than the value of my house. We had a viable business - if I opened the accounts file it was profitable, but we were getting strung out further and further.

“I’d been in business before, but I wasn’t prepared for how these big firms treated small customers. They were quite open about it - they said ‘These are our terms and if you don’t accept them you won’t get our business’.

“The irony was that as we got more successful, the debt file just got bigger and bigger. By the time the business closed, collecting money was practically the only thing we were thinking about.”

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