Aussie small businesses owed A$115 billion in late payments every year

Small businesses in Australia are owed a total of A$115 billion in outstanding invoices every year, with over half of all trade credit invoices to SMEs being settled an average 23 days after they are due.

Xero's Paying The Price report said SMEs sell A$280 billion worth of goods and services to large businesses (defined as a company having over 200 employees) each year. And about 23% of small-business invoices issued by large businesses are paid immediately, with the remaining 77% made on trade credit.

The report estimates Australian SMEs extend A$216 billion in trade credit to large businesses each year. But large businesses seem to have a problem paying on time. About 53% of all invoices, or a total value of A$115 billion, are paid late, usually by 23 days.

When a large business pays a small business late, it is essentially transferring the load of its payables to the receivables of the small business, which is actually unfair to the smaller company. Ending late payments would be equivalent to an increase in the working capital of the small business and a decrease in the working capital of the large business.

This would be the equivalent of A$7 billion in working capital being transferred from large businesses to SMEs.

Small businesses could respond to this by reinvesting the on-time payments into reducing their net debt, thereby lowering their net financing costs. Or they could feel less constrained by capital and have the option to increase their investments in fixed capital and increase their output.

"Unlocking this capital for small business to use will give a significant stimulus to the economy,” said Trent Innes, MD of Xero. “Faster, predictable payments will generate greater stability and confidence among the small business sector. Small businesses will grow faster, have better cashflow, employ more people and take on more business risk."

Xero thinks that if large businesses behaved ethically the combined effect of lower financing costs and increased investment could deliver a benefit of A$4.38 billion over 10 years for Australia’s small businesses.

Most of the benefit comes from SMEs saving on financing as small businesses tend to pay more for financing than big businesses. Research by the Australian Banking Association has found that small businesses often rely on high-cost, short-term funding sources such as credit cards, or on equity-secured loans such as property mortgages. These funding sources have higher borrowing costs compared to bank financing that big businesses often get.

Xero estimates the net economic benefit of the financing cost effect to be almost A$2 billion in financing savings for SMEs over 10 years if they were paid faster.

The research was derived from data on more than 10 million invoices issued by more than 150,000 SMEs. Xero selected businesses that had been on the Xero platform for several years.