Last year New Zealand’s largest company was attacked for extending the time it takes to pay small businesses, with a standard payment term of 61 days from the end of the month that an invoice is sent (a potential payment lag of 90 days).
In Australian media it has been alleged Fonterra also offers loans to small businesses to keep them afloat. Australia’s small business and family enterprise ombudsman Kate Carnell has singled out the co-operative and other large companies for “extortion-like behaviour”.
However in a statement Fonterra said it did not give loans to its small business suppliers.
Instead it offers businesses the option of “supply chain finance” through a United States company Prime Revenue.
After completing work for Fonterra, a business receives an approved invoice from Fonterra and “sells” the invoice to Prime Revenue, who charges the business a fee depending on how quickly it wants to be paid.
Typically the fee is 0.5 per cent of the value of the invoice, but can be higher or lower. Prime Revenue later receives the funds it is owed from Fonterra.
Fonterra defends the system by saying it is offered to their larger suppliers only, assists them with their cash flow, and is much cheaper than an overdraft or special loan.
Rural Contractors NZ president Steve Levet said Fonterra should simply pay on time, as most businesses in New Zealand do, rather than steer contractors to an intermediary company.
“It’s not ethical in my belief. At the moment I’m working on a dairy farm, and right now they have to pay their bills on time.”
Massey University associate professor at the school of economics and finance, David Tripe, described Fonterra’s behaviour as “more of the same”.
“Supply chain finance has a role but in this case it looks like a large business exercising its market power at the expense of small ones.”
The logic for Fonterra was that the system would free up working capital.
Tripe said one advantage of contractors working for Fonterra was the dairy giant’s good credit rating meant they were likely to be paid for their services.
National MP for Whanganui, Chester Borrows, who last year campaigned against Fonterra’s change of payments terms, said if government agencies operated like Fonterra, there would be an outcry.
“They should just pay their bills on time. If you can’t afford it, don’t buy it.”
“They see a competitive edge and because they have a near monopoly they don’t care about their suppliers,” he said.
Neither Levet nor Borrows knew of businesses which had failed as a result of the payment terms.
Having worked for Fonterra for 35 years, Morrinsville Plumbing and Gas Services refused to cave in to Fonterra last year when it changed it terms.
Owner Dave Strong told the co-op he would not accept its new terms and his company is now paid on time.
In its statement Fonterra said it aimed to have strong relationships with all its vendors, who were a crucial part of its business, “and we look to build long-lasting relationships based on two-way communication and trust”.
“We negotiate with them each year to ensure they are comfortable with the terms of their agreement with us, and provide them with the opportunity to renegotiate different aspects to ensure their needs are being met.”
It also offers instant credit card payments for smaller purchases up to $1000.