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 earlier than the customary 30 to 45-day period for 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, after Telstra’s move, now making them the two quickest paying companies on the ASX 100, according to The Sydney Morning Herald. Rio Tinto’s dynamic discounting scheme paid suppliers within a week, rather than 30 days, if they agree to discount their invoices. 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), which posits that dynamic discounting results to SMEs losing control over their payment terms, is 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 the big businesses. With Rio Tinto, it uses a system where its small business supplier will send an invoice and, based on artificial intelligence that uses a variety of indicators and algorithms, approves an invoice and determines how much discount a specific supplier will get. Ms Carnell points out that 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,” which means business with fewer than 100 employees or with revenue in the previous financial year of $5,000,000 or less. Rio Tinto, in its dynamic discounting scheme, defines a small business as a business 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 Herald, the decision to scrap the scheme has left Pilbara suppliers scrambling for sources of or modes to acquire cash. Three managing directors interviewed by the Herald said the mining giant’s scheme has had positive impact on their business and that they are worried because other sources of financing charge more than double.
One of those interviewed by the Herald 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.
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 dynamic discounting 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, but 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 the benefits of dynamic discounting or other cash flow solutions, small business should install a strong credit management system and remain proactive in sending out invoices and collecting on due debts.