The Federal Government will begin paying small business suppliers ten calendar days sooner to improve their cashflow, it has been announced.

Under the Government’s revised ‘pay on time’ policy, Small Business Minister Michael McCormack said federal agencies and entities will be required to pay invoices for contracts worth up to $1 million within 20 calendar days, instead of 30 calendar days under the currently policy.

He described the move as a ‘major win’ for the 6,800 small businesses that work with the Government, explaining that it will ‘put money back in [their] pockets, helping them invest, grow and employ more workers.”

A spokesperson for Minister McCormack advised Dynamic Business that federal agencies are currently transitioning to the new requirement and that it will take full effect by July 2019.

The Minister said the Government’s revised policy was a response to report into Payment Terms and Practices by Australian Small Business and Family Enterprise Ombudsman Kate Carnell. Released in April, the report highlighted the ramifications, for small businesses, arising from the practice of late and extended payment times, including restricted growth and solvency issues. It called out a practice, amongst large organisations, of using small businesses in their supply chain as a ‘cheap form of finance’ by extending payment times.

In the report, the Ombudsman called for the Government to commence paying small business suppliers within 15 business days by July 2018.  She also urged the Government to publish its payment times and policies and to require its head contractors to pay subcontractor invoices within 15 business days.

Minister McCormack also announced that government agencies will be required to comply with the Ombudsman’s recommendation to publish their payment times, noting this would significantly increase transparency and accountability.

“The Government is already a proud leader in terms of payment times and practices, with the latest Pay On-Time survey showing Commonwealth agencies paid 97 per cent of their invoices within 30 days – its highest level ever.”

“Our new payment benchmark will set an example to industry and to other levels of government,” he said. “It will establish a new payment culture within Australia – a culture that recognises small business should not be used as a bank.

The Minister acknowledged the proactive steps taken by industry through the Business Council of Australia’s supplier payments code. Unveiled earlier this year, the voluntary code encourages big business to pay small businesses sooner.

Carnell told Dynamic Business that she was pleased with the Government’s decision to commit to paying small businesses sooner.

“Cash flow is king for small business and this will make a huge difference,” she said.

“It will save money on interest payments, boost confidence and free up capital for reinvestment.”

Although her recommendation had been for Government to commit to paying small business suppliers within 15 business days of an invoice, she said the 20 calendar day policy agreed to was “fundamentally…the same” when accounting for weekends.

Carnell acknowledged that it will take certain agencies a “little longer” than others to introduce the revised code due to “changes required to their IT and other systems”; however, she hoped the Government as a whole would “move as quickly as possible”.

Commenting on the finding that federal agencies were paying 97% of their small business invoices within 30 days, Carnell said that it was a “step in the right direction but Government can do better” because 3% of invoices were still not being paid on time – “that’s a lot of money”.

In addition, she said her office would continue lobbying for the Government to “put pressure on prime contractors to pays its subcontractors in a more timely fashion”. She added, “the Government has noted rather than agreed to my recommendation in this regard”.

She said the Government had indicated a willingness to legislate for big businesses to pay small businesses sooner if a review of the BCA’s supplier code reveals its isn’t effective. In her report into payment terms and practices, earlier this year, she said only legislation, not voluntary codes and ‘other soft measures’ will compel businesses to meet payment standards and address late and extended payment times.