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Late payments and extended terms are still an issue for firms globally. But changes in business culture and increased policy attention seem to be heading in the right direction.

In July 2017, I wrote a widely-read article on extended payment terms1 stating that extended -- and, arguably, unfair terms -- were not only bad for business but seemed to have become the new norm. Since then, recent changes, particularly in Australia, have led us to take a fresh look at the issue. What follows explains what’s different today…

Although many firms -- both large and small -- view extending payment terms as an effective cash management tool, late payments and extended terms have tended to be an issue for firms globally.

In almost every commercial transaction between a seller and a buyer, a delay occurs between supply of the goods or services, and the transfer of payment. This can range from near-instantaneous -- as with a cash or credit card transaction -- to up to months. The duration of the payment terms often reflects relative bargaining power. For example, power skewed toward the seller means shorter terms, while power skewed to the buyer means longer terms. A seller, by agreeing to a delay in payment, has consented to extend an inter-firm loan (trade credit). Essentially, the seller (creditor) is agreeing to loan the buyer (debtor) the value of the order for the period of the delay. 

Globally, typical contractual payment terms remain around 30 days, but such terms are often not honored by the debtor. 2,3,4 A payment is “late”, if it is either based on terms that are longer than generally considered fair, or where payment is not made in accordance with those terms.

My previous article reviewed various measures that small–to-medium enterprises (SMEs) could take to protect themselves, including negotiation of fair terms, charging interest on late payment, and invoice factoring. But this time, I am looking more at ethical, institutional and structural factors influencing payment practices.

Is trade credit the problem?

There’s nothing inherently wrong with trade credit. It is a widely-used and long-established feature of commerce, and one of the main alternatives to bank loans for SMEs.5

But while trade credit has obvious benefits for debtors, creditors suffer.

I previously noted a number of negative effects on SMEs, including cutbacks in R&D and recruitment, and reductions in investment and discretionary spending.

Other negative effects identified since my last article include time spent chasing payments, knock-on delays to upstream suppliers, and reduced benefits to owners and employees, with the consequent impact on morale and productivity.4,5

And when payments are delayed, SMEs are more vulnerable to the consequences, due, for example, to a smaller customer base (and thus more volatile cash flow), and a greater proportion of fixed cost to revenue.2 Often the cost of recovery makes it impractical to pursue the debt. This makes it harder for SMEs to make sound strategic financial decisions, and leaves them more dependent on hard-to-obtain external financing.4 For instance, late payments caused approximately one out of four bankruptcies in the European Union (EU).4

Given the relative importance of SMEs to the global economy, anything that has a broad negative impact on SMEs will negatively affect economies as a whole.2,4

Ethical considerations

Any business practice that unreasonably favors the interests of one party over another could be considered at best amoral and potentially immoral.5 Regulators and courts in general seek to stay out of commercial arrangements between well-informed and capable parties. But the prevalence of industry and policy initiatives targeting late payment indicates a general ethical concern. The asymmetry of power (where the debtor has more power to enforce favorable terms than the creditor), is an important factor.5 And it does appear this was the basis for earlier initiatives. The UK Late Payment Act 1998, for example, considers “grossly unfair” provisions, as does Australian Consumer Law.6,7

Previously, we believed that late payment was mainly an asymmetry of power issue, where large firms were the delinquents and SMEs the victims. But it’s more complicated than that. New global research indicates that it is an issue common to all payers, and in fact small companies may be more likely to pay late due to the knock-on effects of late payments they receive.2

However, in an Australian August 2017 report, Dun & Bradstreet found that entities listed on the Australian Stock Exchange (ASX) were significantly less likely to pay on time than other firms.8 Similar results were found in China,5 while in the EU, public authorities were the most likely to be delinquent.4

But, interestingly, Cowton & San-Jose argue that suppliers, too, should not inappropriately grant trade credit, and if they must accept extended terms for power asymmetry reasons, they should adopt protective measures such as invoice factoring (see my article1).

Plum Consulting noted that the two most common barriers to chasing late payments are concern over client relationships, and lack of resources to pursue them, while SMEs are commonly given no reason why the payment is late.2 However, in Asia Pacific at least, payment delays were most often due to insufficient funds or complexity of the payment procedure.9 

Unfortunately, SMEs are particularly exposed to payment terms imbalances, where they often must make purchases on short terms (eg through credit cards), but only receive payment on long terms.

So what has changed since July 2016? 

Since my 2016 article, some large firms have quietly pulled back their payment terms. Rio Tinto, for example, announced in May 2017 that they would reduce payment terms for smaller Australian suppliers to 30 days.10 

But while some things seem to have improved in Australia, the overall picture is less cheerful. Dun & Bradstreet found that while policy changes seemed to be having a positive effect, late payment is still an issue. For example, only 12% of ASX-listed companies paid on time, while payments were on average almost 15 days late.8 In Asia Pacific, more than 45% of B2B invoices were overdue.9

Globally, more than one in ten invoices (11%) paid to SMEs are still paid outside payment terms, and 7.5% of invoices are eventually written off as bad debt.2

Policy trends

Previously, I discussed policy changes taking place in the EU, UK and Australia. Since then I have seen positive steps taken both by industry and government. However, while policy does seem to be having a positive effect, much of the improvement could also be ascribed to improving economic conditions, with deteriorating performance clearly associated with an increase in late payments (eg in Western Australia).8 

In our last article, we noted the introduction of the 2011 EU Late Payment Directive (2011/7/EU). While the Directive appears to be having a positive effect, the EU conceded in mid-2016 that late payment remains a major problem and is "hurting" many companies.11 An EU poll highlighted a lack of common monitoring, clarity of key concepts, and market imbalance between bigger and smaller firms.11 Shopovski also found that while the EU Member States have harmonized with the directive, it had not yet had much of an effect on bad payment behavior.4 

A 2016 study by the US National Bureau of Economic Research (NBER) of a 2011 initiative found that accelerating US federal government payments to small business contractors caused a substantial positive impact on cash flow.12

In April 2017 the UK Government introduced statutory requirements for large companies and large limited-liability partnerships (LLPs) to report on their payment terms and practices.13

But changes in policy do not have to mean more regulation. The negative effects of additional legislation and red tape are well-recognized. The Australian Government noted that transparency and education were likely to be more effective in reducing late payments than additional regulation.

Rather than imposing more legislation and red tape, a more effective step to improving supplier payment culture is by educating and making businesses more aware of the impacts from late payments and poor practices on suppliers. Increasing transparency would also ensure that companies with poor practices find it in their best interest to improve their practices.3

The Australian Government further recently committed to 20 calendar day terms from invoice receipt by 2018, with many departments already adopting shorter terms. The Australian Government sees this initiative as influencing payment practices economy-wide. The Australian Government also encourages the use of payment cards (debit or credit) for transactions less than $AUD10,000.3

The Business Council of Australia (BCA) adopted a new Australian Supplier Payment Code in 2017.14 This Code “commits signatory organizations to pay eligible Australian small business suppliers on time and within 30 days of receiving a correct invoice.” As of 24 October 2017 the Code had 61 signatories. 3

While the Australian Government noted the new UK reporting legislation mentioned above, “the Government’s preference is for industry to self-regulate in the first instance.” 3

The general pattern for the various initiatives is to specify a hard maximum payment period (eg 30 days). Cowton & San-Jose propose a more nuanced approach, where the appropriate payment period is one where the creditor’s wait-for payment is equitably balanced with the debtor’s wait-for payment down the supply chain. Such an approach would be difficult to legislate for or monitor compliance to. 

But the general principle that the trade credit period should be set by reference to the relative ‘stickiness’ of cash flow (such as transactions with prompt reciprocation should attract shorter terms, and there should be a balance between terms of sale and terms of purchase) is sound and supported by industry practice. The increased adoption of e-invoicing, payment cards, B2B automated invoicing and other digitally-mediated transactions, facilitates this flexibility. 

Late payment still a chronic concern

While the policy and industry landscape has clearly shifted in favor of fair and timely payment, late payment remains a chronic concern for large and small firms alike. The consensus appears to be that the most effective measures for reducing the likelihood and consequences of late payment are:

  • better education on the effects of late payments;
  • increased transparency of payment practices;
  • wider adoption of industry-led codes of practice; and
  • improved access to enabling technologies such as e-invoicing.


  1. Simpson, J., 2016. Extended payment terms: who really pays the price? Contracting Excellence Journal. Available at: [Accessed December 14, 2017].
  2. Miller, T. & Wongsaroj, S., 2017. The Domino Effect: the impact of late payments, Plum Consulting. Available at:
  3. The Australian Government the Treasury, 2017. Payment times and practices, Available at: [Accessed December 14, 2017]
  4. Shopovski, J., 2016. Late Payments in Commercial Transactions in the European Union: Are we Getting Better? European Journal of Scientific Research, 140, pp.436–447. Available at: [Accessed December 14, 2017].
  5. Cowton, C.J. & San-Jose, L., 2017. On the Ethics of Trade Credit: Understanding Good Payment Practice in the Supply Chain. Journal of Business Ethics, 140(4), pp.673–685. Available at: [Accessed December 10, 2017].
  6. Late Payment: challenging grossly unfair terms and practices: Department for Business Innovation and Skills: issued Feb 2015:
  7. See, eg, 2015 amendments to the Australian Consumer Law and the Australian Securities and Investment Commission Act 2001 (Cth) which extended unfair contract term protections to small businesses, and proposed amendments to the UK 2013 Late Payment of Commercial Debts Regulations.
  8. Dun & Bradstreet, 2017. Late Payments in Australia: The factors that determine who gets paid on time, Available at: Late Payments 2Q17 Final.pdf [Accessed December 14, 2017].
  9. Atradius, 2017. Payment Practices Barometer APAC 2017 | Atradius. Available at: [Accessed December 14, 2017].
  10. Rio Tinto, 2017. Faster payment terms for Rio Tinto’s smaller Australian suppliers. Available at: [Accessed December 13, 2017].
  11. Banks, M., 2016. Late payment still hurting many EU companies. The Parliament Magazine. Available at: [Accessed December 14, 2017].
  12. Barrot, J.-N. & Nanda, R., 2016. Can Paying Firms Quicker Affect Aggregate Employment?, Available at:
  13. UK Government Department for Business Energy & Industrial Strategy, 2017. Duty to Report on Payment Practices and Performance, pp.30. Available at: [Accessed December 13, 2017].
  14. Business Council of Australia, 2017. Australian Supplier Payment Code | BCA. Available at: [Accessed December 13, 2017].

About the Author

Joanne Simpson is Director of Corvative Pty Ltd, a contract and commercial services consultancy based in Perth, Western Australia. She has 20+ years of procurement, contracts and commercial experience in major studies, projects and operations in resources and infrastructure. She holds Masters Degrees in Business Administration from the University of Western Australia and in Construction Law from the University of Melbourne in Australia.

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Joanne Simpson, Director, Corvative Pty Ltd. Australia.

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