My heart was gladdened recently by the spectacular collapse of Greensill Capital, once a darling of the financial and (some) political elites in Australia and Britain. I know it’s unbecoming to gloat over a business demise, but I viewed Greensill’s business model as dodgy and exploitative of small business.
Greensill was a ‘leader’ in reverse factoring, also known as supply chain financing. In its simplest formulation, reverse factoring enables a supplier to receive faster payment of money owed to it by paying a fee to a finance company. The finance company pays the supplier and takes over the debt. It can be good.
But the way it was working under Greensill had the stench of ‘come in sucker’’
Greensill claimed to have hundreds of clients, all of whom seemed to be big-end-of-town types. These included Telstra and Australian Rail Track Corporation. Australia’s largest construction conglomerate, CIMIC, was involved, along with Sanjeev Gupta’s GFG Alliance, the superman saviour of British and Australian steel operations, including the troubled Whyalla Steelworks.
But the trick that was happening under Greensill is that its clients seemed to routinely screw their small business suppliers by extending payment terms out to 90+ days. That is, these large, powerful conglomerates used their small business suppliers as cash cows, bleeding the small businesses of money. The deal then was that the small businesses would pay a commission to Greensill so that Greensill would pay them the money they were owed by the conglomerate.
In summary, the conglomerate takes money from small business by extending payment terms. Then the small business had to pay Greensill to be paid. For small business it was rip-off territory.
The Small Business Ombudsman investigated and released a damning report in April 2020, recommending legislation requiring small business to be paid within 30 days.
But what was really on display here was capitalism at its grubby, manipulative worst. It’s this sort of behaviour that provides the moral justification for Marxist theories of class warfare. Not the worker versus bosses war in this instance, but big business versus small business conflict.
Market economies and societies are not Wild West, unrestrained capitalist societies. Capitalism is a subset of market organisation, albeit a necessary subset. But capitalists will exploit if unrestrained. And they don’t care about the damage they do to others. Such is untempered greed.
Successful markets regulate behaviour. Good market regulation is as ‘light touch’ as possible. But I don’t buy the ‘no regulate’ line, that markets will work themselves out. How wrong is that idea?
In the Greensill case, the regulators had moved in on this reverse factoring model. Conglomerates such as Telstra and others received regulatory and political sharp messaging. “Back off buddies!” Even mining giant Rio Tinto came to the ‘pay on time’ party. Rio had stretched small business payment times out beyond 90 days. But following a major backlash, in early 2020 it proudly announced it was now paying small business suppliers within 20 days.
This was no political accident.
In the 2019 Federal Election campaign the Morrison Coalition made a firm commitment to introduce a package of small business pay-on-time laws. This included the government paying small business suppliers within 20 days, as well as requiring large businesses contracting with government to do the same. And further, establishing a compulsory small business pay-on-time reporting system for all large businesses.
As of now, each of these promises has been implemented or is in the final stages of implementation. Cross party-political support has been firm. In this environment, Australian clients of Greensill were seriously out of step with political and regulatory thinking. The big business, capitalist exploitative opportunity evaporated. Arguably Greensill was doomed.
In this case the damage to small businesses by the exploitative reverse factoring game was limited. The regulatory push moved in comparatively early. Too often, if the market is unregulated and left to ‘self-correct’, the damage to individuals is horrendous. Harm done to a few cannot be justified by the alleged benefit of the greater good in the long term.
In this ‘pay on time’ story we can witness perhaps an example of quality, ‘light touch’ regulation. Government is leading by example by paying on time. It expects the same standard from its large business contractors. It’s creating public transparency about transactions in the economy. Transparency is vital to a well-functioning market economy.
But more, this story shows the damage done by delayed payments through an economy. Using suppliers’ money to fund your business is shady business. If you need a loan, go to a bank. The faster businesses pay one another, the faster money moves through the economy. Bad debt and bad businesses are exposed more quickly.
And there’s one simple principle in play. If you owe money: pay.
Ken Phillips is Executive Director of Self Employed Australia.
Got something to add? Join the discussion and comment below.