Big businesses rip off A$7 billion from small companies annually

A survey has shown late payments to be a A$7 billion problem, significantly slowing the growth of SMEs in Australia.

The survey, based on data collected by Xero and prepared by AlphaBeta Advisors, finds that large businesses pay over half (53%) SMEs' invoices late. They are usually settled an average of 23 days after they are due. And with small business issuing A$216 billion in invoices each year, this means they are seeing A$115 billion in late payments.

The study finds that SMEs, which are paid slower than average, have about one-thirds lower revenue growth than those paid more quickly. Long payment times also have a domino effect across the economy, as SMEs that are paid slower than average tend to pay their own suppliers eight days later than those paid faster.

If late invoices were paid on time, it would be equivalent to transferring A$7 billion in working capital from large businesses to SMEs. The money could be used by the SMEs to reduce their net debt, thereby lowering their net financing costs, or increasing their investment in fixed capital and increasing their output.

SMEs pay more for financing than large businesses. According to data from the Reserve Bank of Australia, SMEs pay average interest rates of 8% compared to the 3% large businesses pay. Small businesses are more credit constrained and face higher finance costs than large businesses.

Research undertaken by the Australian Banking Association has found 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.

The survey estimates the net economic benefit of the financing cost effect to be A$1.99 billion in savings over 10 years if large businesses paid SMEs faster. This is calculated by taking the reduced financing costs of the SMEs and subtracting the increased financing costs of the large businesses.

The combined effect of lower financing costs and increased investment opportunities is estimated to deliver a benefit of A$4.38 billion over 10 years to the small business sector.

On a national scale, large businesses paying their invoices on time will deliver a net positive economic benefit to the Australia economy of $2.54 billion over 10 years.

The survey analyses more than 10 million invoices issued by more than 150,000 small and medium businesses.