The Late Payment Culture in Australia is a Boon for Invoice Finance Companies
Business conditions in Australia have surged in recent weeks and a reprieve from a hike in interest rates seems likely, at least in the short-term. The ASX 200 has risen and data from a national survey carried out by the National Australia Bank shows that business confidence is now 10, which is the highest it has been in three years. Unemployment levels are also falling, which is another indication that the business climate in Australia is flourishing after a shaky few years.
It was only a few months ago that the Reserve Bank of Australia predicted Australia was heading into a recession. Mine closures, a drop in demand for raw materials from Australia’s main customer, China, and growth in construction slowing down, have all contributed to a decline in economic growth. Fortunately, following an upturn following President Trump’s election in the US, the Australian economy has recovered somewhat and the RBA has since backtracked and announced the economy is predicted to grow 3% in 2017.
An Increase in Business Lending
The boost in business positivity has led to an increase in business lending. Many Australian businesses are taking out short-term loans to help them build their businesses. A rise of 2.4% in fixed term loans in December indicates that businesses now have greater confidence in the Australian economy. In many cases, short term loans help cover cash flow problems, which is a real issue for businesses in Australia.
The Late Payment Culture
When the Payment Rimes and Practices inquiry conducted a survey of small businesses, 50% of them reported issues with late payments. This led to cash flow problems with nearly three-quarters of the businesses questioned. Unfortunately, the late payment culture is endemic in Australia.
Research carried out by a UK finance company found much the same results. Based on data collected over five years, it takes, on average, 26.4 days for an invoice to be paid. In Japan, most invoices are paid well before the due days, within 6.5 days. The worst offenders are high street retailers, who typically take up to 14 days to make payment. Banks usually pay one day after the due date.
Credit Reporting Agency Dun & Bradstreet estimates businesses don’t have access to $19 billion because invoices are not paid within the standard 30-day payment term. It’s not the first time this issue has arisen. Back in 2013, the Federal Government’s Department of Innovation published a discussion paper outlining the effect of late payments on businesses. They said the problem damages business relationships and adds extra administrative costs, which invariably weakens smaller businesses.
The Rise of Invoice Financing
Not surprisingly, invoice finance is big business in Australia. Many businesses use invoice financing to raise cash from slow paying receivables. Businesses can sell their unpaid invoices to invoice factoring companies, or use them to secure a revolving line of credit. With the late payment culture a real issue in Australia, invoice finance is a common way to secure working capital, which for smaller businesses is essential for staying afloat.
The fintech revolution may have revolutionised the payment process, but multinationals such as Mars still try to push their payment terms out as far as 120 days. It’s no wonder that for many SMEs, it is cheaper to use invoice financing than pay overdraft interest.