Rio Tinto scrapped its proposed dynamic discounting because of backlash from small- to medium- suppliers. The mining giant says the scheme will benefit its 10,000 suppliers by offering payments within a week. The catch is, the suppliers will need to agree to invoice discounts of up to 2.0%.
Following the backlash, Rio Tinto is instead slashing its payment terms to 20 days for 90% of its suppliers. Telstra is also making the same move, making the two companies the quickest paying companies on the ASX 100. In the new scheme, Rio Tinto will transition small businesses with annual turnover up to $10 million to payment terms that will pay them within 20 days of receipt of a valid invoice.
Small Business Ombudsman Probing Extended Payments
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) posits that dynamic discounting results to SMEs losing control over their payment terms. The ombudsman is also investigating the effects of supply chain financing on SMEs. The agency will release a final report in March. Meanwhile, a position paper on the agency’s preliminary findings is available at its website.
Small business ombudsman Kate Carnell pointed out that through dynamic discounting, payment terms are now the ballgame of big businesses. With Rio Tinto, it uses artificial intelligence (AI) that approves a supplier’s invoice. The AI also determines how much discount a specific supplier will get. These discounts vary so suppliers will not have control over how much it will get for a specific invoice.
The ASBFEO is also concerned that big businesses are creating their own definition of terms. Specifically, the ASBFEO points out that big businesses like Rio Tinto redefined “small business.” Per the ombudsman, a small business is one with fewer than 100 employees. A small business could also be one with revenue in the previous financial year of $5,000,000 or less. Rio Tinto’s definition of small business is one with less than 20 employees with a turnover threshold of $10 million. According to the ASBFEO, this redefinition has excluded many businesses that would otherwise satisfy the common definition of small business.
Suppliers Bracing for Impact
Rio Tinto’s dynamic discounting scheme is not all bad though. According to the Sydney Morning Herald, the decision to scrap the scheme has left Pilbara suppliers scrambling for sources of or modes to acquire cash. Three managing directors told the Herald that the mining giant’s scheme has had positive impact on their business. They are worried because other sources of financing charge more than double.
One of those interviewed welcomes the 20-day payment term but believes dynamic discounting was better because it offered improved cash flow. They pointed out that joining the dynamic discounting scheme was voluntary so suppliers were not forced into Rio Tinto’s terms. Another managing director said the system was “fantastic” because it helped cover cash flow waiting for payments from other people.
Key Takeaways
Dynamic discounting as a business solution is not bad per se. It is an evolution of discounting, which is an age-old practice in trading. Rio Tinto used the scheme dynamic to strengthen its partnership with suppliers by giving them access to software for easier and faster payments. Some suppliers were able to bank on the positive impact of the scheme. However, the small business agency have valid concerns as well, considering the decrease in the amount of control the suppliers have over their relationship with big businesses using dynamic discounting.
Adequate cash is most important to small businesses because inadequate cash flow remains the top reason small businesses fail. To take full advantage of these cash flow solutions, small business should install a strong credit management system. Small businesses should also remain proactive in sending out invoices and collecting on due debts.
Liam White joined the Slater Byrne Recoveries team in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently working in a Marketing/Head of Sales capacity at Slater Byrne Recoveries.