Trade credit in Australia – as opposed to bank credit – is a vital source of business funding. By offering trade credit, goods and services can be exchanged before payment needs to take place, usually on interest-free terms that vary by industry and business type.
The exact terms make it possible for businesses big and small to manage short-term cash flows. It is estimated that Australian SMEs provide trade credit in the order of $1.3 trillion per year.[1]
These “net terms” are pillars of most supply chains and account for between 10% and 35% of all SME liabilities.[2] The use of terms is so widespread that, if combined as a source of capital, it would create the 5th largest bank in Australia by assets.[3]
And since much of this trade credit is provided by non-financial institutions, it means everyday businesses across Australia are acting like banks.
The majority of this trade credit is provided by suppliers, with terms that range from 7 to 60 days. In aggregate, through these in-house trade credit programs, suppliers are practically the largest non-bank provider of finance in the country.
But trade credit is far from uniform: it varies by industry and business size.
The chart below shows accounts payable and receivable (using or extending trade credit as buyers and suppliers), relative to the company’s assets.
ndustries that are involved in the production or distribution of goods (construction, retail trade and wholesale trade) tend to use trade credit more intensively than say service and finance industries, which have reduced inventory requirements.
Also, the use of trade credit tends to increase with business size (using employee numbers as proxy). This could reflect a weaker bargaining position of smaller businesses when compared to larger suppliers.
Banks and other financial institutions have attempted to get involved in supply chain financing using an assortment of products like factoring, supply chain finance, card schemes and others. However, none of these solutions have been able to solve some of the more fundamental problems associated with trade credit: freeing up capital for buyers and suppliers, providing improved flexibility, and recognising that a trade relationship is more than just a financial transaction.
To learn more about SME Trade Credit and the case for a new model, download the report.
[1] Based on GetCapital analysis of RBA data with adjustments for consumer payments.
[2] Dun & Bradstreet; RBA, SME accounts payable dataset
[3] Assuming current outstanding accounts payable against the current assets of Australia’s 5th largest bank, ING.
Trade credit is the practice of supplying goods and services to a business or individual with an agreed payment at a later date.
Not all businesses use trade credit. Instead, some businesses and sole traders require upfront, cash-on-delivery or even pre-payment for goods and services supplied.
In allowing a delayed payment, also known as “net terms”, businesses are providing their customers with a form of credit financing, in turn also accepting a degree of risk associated with that financing.
In so doing, you might say they are acting like a bank.
The exact nature of B2B trade credit and their specific trade terms varies by industry and also among businesses within those industries.
The very existence of trade credit is a vital component of business and economic activity around the world, but in its current form, it’s fundamentally outdated and inefficient. The duplication of financial services roles and consistent late payments place huge strains on time and business cash flow (not to mention relationships!).
The space is ripe for innovation and a more efficient and effective trade credit function would have significant benefits for both individual firms and economies as a whole.
For example, a successful trade credit platform would facilitate low friction payments between buyers and suppliers, should be independent, be fit for purpose, acknowledge the intimate relationship between the parties, simple and easy to register and use, allow buyers the flexibility to control when they pay and must be scalable.
GetCapital built just such a platform – Shift Payments – as a solution to the trade credit problem.
Shift Payments is a flexible trade account that serves both the buyer and supplier and removes the stress of trade terms from the relationship. With Shift Payments, suppliers can get paid immediately and buyer can control payment terms. Supplier receivables are converted to cash in the process, removing accounts receivable from their balance sheet. On the other side of the ledger, buyers control when they pay; allowing both parties to optimise without adversely impacting their relationship.
Shift reduces transactions down to eight clicks and removes the need for businesses to take responsibility for any credit functions (e.g., onboarding, limit setting, funding, credit risk and collections).
To learn more about SME Trade Credit, the case for a new model and how Shift Payments can streamline your payment terms, download the report.
Late payments are a perpetual problem for businesses around the world, including Australia. When doing business, companies typically agree to payment terms in exchange for goods and services.
However, according to research, Australian businesses receive their payments consistently late – almost 10 days overdue to be precise.[1]
On average, that’s more than a full third longer for businesses on 30-day terms, which applies to 96% of all businesses surveyed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).[2]
According to that survey, 1 in 2 respondents reported greater than 40% of their invoices were paid late.[3]
And small businesses are hit the hardest.
According to Xero, late payments by large businesses to small businesses account for 53% of invoices.[4] So put another way, small businesses are effectively funding the cash flow of larger companies. This leads to increased pressure on small business and a stall on money circulating in the economy.[5]
Amid a fresh wave of big businesses using the COVID-19 crisis as an excuse for delayed or extended payment times, the ASBFEO recently reiterated the need for federal legislation requiring small businesses to be paid in 30 days.
Delayed payments have a direct and severe impact on the working capital and growth potential of small and medium enterprises. Instead of being paid on time and using the cash flow to grow, SMEs are forced to borrow, use credit cards or find other ways to finance their working capital shortfall.
Long payment terms and late payments add significant cash flow pressure to SMEs. And lack of cash flow is a leading cause of business insolvency, underscoring the importance of late payments as an issue that can easily put many businesses out of operation.
Coinciding with the recent surge in larger businesses pushing out payment times to their small business suppliers, and ASBFEO’s recommendation, the federal government introduced a draft Payment Times Reporting Framework legislation.
The bill will require businesses with turnover of more than $100 million to publish information about their payment policies, reporting on how quickly they actually pay their small business suppliers. This applies to around 3,000 Australian large businesses, including foreign subsidiaries along with certain government enterprises.
The legislation also defines a small business as those with a turnover of less than $10 million, a definition that covers 99% of all businesses, as in the past inconsistent or ambiguous definitions of “small business” masked the extent of the late payments problem.
To echo the sentiments and recommendations of ASBFEO, it’s evident that more support is needed to help SMEs get paid on time, preserve their cash flow and enable growth.
To learn more about SME Trade Credit, the case for a new model and how Shift Payments can streamline your payment terms, download the report.
[1] Australian Late Payments Report, December Quarter Analysis 2019, ilion.
[2]Payment Times Inquiry in 2017, Australian Small Business and Family Enterprise Ombudsman.
[3] Survey results – Payment Times and Practices Survey 2016-17, ASBFEO (n = 2,758).
[4] Xero Small Business Insights, ‘Paying the price, the economic impact of big businesses paying Australian small businesses late’, June 2019.
[5] Supply Chain Finance Review – Final Report, March 2020, Australian Small Business and Family Enterprise Ombudsman.
B2B trade credit has not seen much innovation in the past 40 years, despite significant digitisation and technology advances across supply chains. The way trade credit has traditionally been supplied by non-financial entities is driven by market forces of supply and demand. Over time, it has created a power dynamic mismatch between buyers and suppliers, as the use of market power turns trade credit into a zero-sum game with gains on one side and losses on the other.
In particular, small businesses have very little bargaining power compared to larger entities, which benefit from having a greater number of potential suppliers in just about any marketplace. This impacts the ability of small businesses to demand – and receive – fair payment terms for the goods and services they produce.
Supply Chain Finance (SCF) is a buyer-led program that is a perfect example of this. With SCF, the balance of power in the trade relationship tends to sit squarely with the buyer who dictates the trade terms to its suppliers.
In theory, SCF should provide short-term credit that optimises working capital for both parties. In practice, however, too often it results in a Win-Lose scenario that amplifies the power of the larger party.
When fair payment terms and times are not effectively managed within the supply chain, small business cash flow suffers, along with growth potential. As the larger company exploits its market position to boost cash flow, they end up treating suppliers like a bank account.
On the other side of the ledger, evidence suggests that suppliers with strong market power are far more likely to be restrictive in the way they manage their trade portfolios and offer trade credit – in fact, they are more likely to provide less generous terms and manage them more aggressively.
The current in-house (captive) trade credit model causes problems to arise throughout the trade ecosystem. For example, how trade terms interplay with a businesses’ trade cycle can have a profound impact on financial performance.
To learn more about SME Trade Credit, the case for a new model and how Shift Payments can help streamline your business, download the report.
Offering trade credit terms is standard practice for businesses in many industries. Both the amount of trade credit (the limit) as well as the length of the terms offered, are important elements of the overall trade relationship between buyer and seller.
Part of the reason third-party finance solutions have not effectively disrupted in-house trade finance programs is that they fail to recognise that trade terms form a core part of the supplier-customer relationship.
Offering trade credit increases the stickiness of the customer relationship and provides the supplier with an additional (non-price related) tool to use in commercial negotiations with their customer.
Trade terms cannot simply be outsourced to a financier or be replaced by a financial product. Innovation of trade terms needs to balance the need to maintain the intimacy of the supplier-buyer relationship while removing cost and friction and adding flexibility to both parties.
Understanding the nature of this relationship provides useful insights into the characteristics a potential alternative should address in solving the deficiencies of the current trade credit model. It should acknowledge the intimate relationship between buyer and supplier and that the provision of trade terms forms an integral part of this relationship.
To be fair, a number of finance products exist today that attempt to solve the trade credit problem. However, all have significant drawbacks that make them impractical for a majority of SMEs.
For example, Supply Chain Finance often results in a Win-Lose scenario that amplifies the power of the larger party in the trade relationship.
When customers pay with card schemes, the traditional features of a supplier-run trade credit program – like checking a buyer’s available credit limit, having flexibility on a request limit, or the ability to charge an account directly – aren’t available. Without these features, suppliers will find it harder to be flexible or build rapport with their customers.
Factoring is not very transparent as accounts receivable are sold to third parties. And transparency is necessary to build trust in the trade relationship.
Easy trade relationships allow businesses to focus on what they do best. To address the intermingled issues of credit, payment and collections, the solution must be fit-for-purpose and be delivered via a single technology platform that recognises the recurring nature of trade between the parties but addresses changes in the needs of the parties over time.
Shift Payments is a flexible, independent trade account that serves both the buyer and supplier and removes the stress of trade terms from the relationship. With Shift Payments, suppliers can get paid immediately and buyers can control payment terms; allowing both parties to optimise without adversely impacting their relationship.
To learn more about SME Trade Credit, the case for a new model and how Shift Payments can streamline your payment terms, download the report.
With so much business capital outstanding as part of the trade credit economy, it’s safe to say that nearly every business in Australia, large and small, is linked in some way to this vast ecosystem.
Far from a win-win solution, trade credit is actually quite complicated. Net terms range from 7, 14, 30, 60 days or more, but in practice are quite flexible and hard to enforce. On average, 96% of Australian businesses work with 30-day terms, but a large portion report consistently overdue payments by an average of ~10 days.[1]
So why do businesses provide trade credit in the first place?
To answer this question, we need to consider the dynamics of both the use (buyers) and supply (suppliers) of trade credit.
The case for using trade credit is fairly straightforward: it’s fit for purpose, low cost or no cost, it helps improve ROE, boosts business growth and assists with timing uncertainty.
The case for the supply of trade credit is less clear and associated with the fact that it has become standard market practice over time, can support buyers’ inventories and to improve bargaining power, among other reasons.
The issue is not the existence of trade credit, but instead the form in which it has been provided historically. The current model is chronically inefficient and puts a heavy toll on SMEs that provide trade credit.
First, it requires SMEs to provide financial services outside of their primary business; second, there is a high financial cost associated with holding large accounts receivables on balance sheet; and third, the cost and administrative burden from running an in-house trade credit program is significant.
In terms of the duplication of financial services alone and wasted time and effort:
Also, the use of trade credit tends to increase with business size (using employee numbers as proxy). This could reflect a weaker bargaining position of smaller businesses when compared to larger suppliers.
Extending trade terms ties up a lot of capital in accounts receivable and can have a real impact on profits – particularly for smaller businesses – as a result of the extra financial, administrative and related costs involved. GetCapital estimates that the cost of running your own trade credit account can reach anywhere between 3% and 4% of sales.
To learn more about SME Trade Credit and the case for a new model, download the report.
[1] Australian Late Payments Report, December Quarter Analysis 2019, ilion; Payment Times Inquiry in 2017 and Survey results – Payment Times and Practices Survey 2016-17, Australian Small Business and Family Enterprise Ombudsman.
[2] ABA, Employment Statistics
[3] Australian Government, Job Outlook, assumes $1,190 weekly wage for 93,300 accounts workers.
In an ideal world, goods and services are supplied, supplier invoices follow, and payments are made on time. In the real world, not so much.
Xero estimates that almost half of all supplier invoices are settled late. In a study of several million invoices across their 500,000 small business subscribers, they found that almost half of all invoices with 30-day payment terms languished for about 60 days before being paid.
The interruption to cash flow has a deep impact on the obligations of small business owners. More than 40% of retailers report having trouble paying their suppliers on time. That means materials can’t be replenished; orders can’t be fulfilled; opportunities are lost.
Caught in the cycle of non-payment, business slows to a crawl.
As part of the fast-growing specialist SME lending sector, there are new, innovative and cost-efficient ways to pay supplier invoices on time. Non-bank lenders in this space are using technology and innovation to remove the friction in traditional banking transactions.
GetCapital has developed Shift Payments, a payments platform that simplifies trade credit. Your suppliers get paid on time, every time, and you get better trade terms.
It takes just 3 simple steps to make sure your business never misses a beat.
Open your account directly online – or with phone support – using an intuitive ABN lookup function and real-time ID verification for company directors. With the account set up, activate it by linking bank details: your account will be approved within 15 minutes! If approved, Shift will set you up with an initial minimum $2,000 credit limit to immediately begin paying your suppliers.
Once your trade credit account is open, you can upload your invoices for Shift Payments to pay your suppliers directly, usually within the next business day. It’s that simple.
While your supplier gets paid right away, you can pay later on your own terms. Shift offers you up to 14 days free payment terms. If you need more time to pay, you can select more flexible repayment terms up to 90 days for a nominal fee.
Other solutions: Import Line of Credit
There are also more traditional trade finance products like an Import Line of Credit to pay overseas suppliers.
As a revolving line of credit, this is a product that allows businesses to make repeat transactions, within their approved limit. This means repayments replenish the credit balance and interest is only payable on funds used.
Thanks to improved credit decisioning technology, real-time secure data links and third-party integration that leverages thousands of data points, facilities can be approved in as little as 24 hours.
Usually no financials are required for applications under $150,000, and once approved, your overseas suppliers are paid directly. You can even get access to better-than-banks foreign exchange rates. So making overseas stock purchases at the optimal time need never be a problem.
No overseas suppliers? No worries.
If your suppliers are all domestic, there’s an application for that!
In this new marketplace, you will find innovative business overdrafts, and working capital facilities and business loans with redraw options that can be used for any business purpose. Following the same quick and convenient online application process, businesses can access up to $750,000 within 24 hours to pay invoices from local suppliers.
Almost 75% of Australian businesses use external finance to fund growth, manage cash flow and pay operating expenses and suppliers. Competition is breaking down barriers, helping new lenders serve customers in a much faster way with a better experience, more choice and greater convenience.
To learn more, talk to us. As an award-winning, non-bank business lender to Australian SMEs, we offers fair and transparent financing facilities to mainstream businesses including business overdrafts, working capital loans, trade finance facilities, equipment finance as well as property secured loans.
