Rio Tinto slashes supplier payment terms days after scrapping dynamic discounting

Rio Tinto has followed Telstra in immediately slashing its payment terms to 20 days for 90 per cent of its suppliers following months of intense media and analyst scrutiny of big businesses procurement practices.

It also follows backlash from Rio Tinto's Pilbara suppliers, upset the miner scrapped its 'dynamic discounting' scheme last week, which allowed suppliers to shave money off invoices in order to be paid within a week rather than 30 days.

Rio Tinto has dropped payment terms to 20 days for its smaller suppliers.Credit: Nikola Bilic

Under the changes, Rio Tinto will immediately begin transitioning small businesses with annual turnover up to $10 million to payment terms that will see them paid within 20 days of receipt of a valid invoice.

Rio Tinto chief commercial officer Simon Trott said being paid quickly was important for small business cash flows, which was why they were shortening their payment terms.

Telstra has also decided to drop its payment terms to 20 days after scrutiny of its payment practices, which means the two companies are now some of the quickest paying on the ASX 100.

The Business Council of Australia’s voluntary supplier payment code, which is followed by Rio Tinto's rivals BHP and Fortescue, urges payment to small suppliers within 30 days.

'Vicious cycle'

Rio Tinto began trialling its dynamic discounting scheme in February 2019, which saw 300 Pilbara businesses use software to choose which invoices they wanted to shave money off to receive the payment earlier than the company's standard 30 to 45 day terms.

The scheme worked on a sliding scale, with many businesses offered a maximum of 1.5 per cent off an invoice for payment within a few days. The longer the supplier is willing to wait for the payment, the less money shaved off the invoice.

Dynamic discounting is one of two emerging payment practices that have raised concerns by analysts and the media over their potential to increase payment terms by stealth and their ability to hide weaker financial positions.

The other form known as reverse factoring sees a bank or other financier pay a company’s supplier a portion of the total invoice. The company then pays the bank directly in line with its normal payment terms.

These concerns prompted big companies such as Rio Tinto and Telstra to scrap the practice last week.

But the negative reports and Rio Tinto's decision to scrap the scheme has left several of its Pilbara suppliers scratching their heads because of the positive impact it has had on their businesses.

Now they're mobilising a defence of it and are calling for it to be reinstated.

Argonaut Engineering and Construction managing director Ryan Simmonds welcomed the 20 day payment terms but said dynamic discounting was still a better system that offered them improved cashflow and allowed them to double their workforce in less than a year.

“I specifically chased them down try to get on it,” he said.

“Since they’ve introduced this we’ve doubled our work crew, we’ve increased our capabilities and brought on new plant and equipment.”

He said under the old terms businesses were forced to hold out other suppliers, hurting everyone down the chain.

“It was a vicious, vicious cycle. Everyone was bankrolling their projects off everyone else and it was very hard to grow your business,” he said.

Mr Simmonds said he would be happy to wear double what Rio Tinto was charging under its dynamic discounting scheme if it meant better cash flow.

“You don’t even notice it, 1.5 per cent is absolutely nothing and you probably lose more than that by having such a burnt-out relationship with your suppliers because you’re always paying late,” he said.

The miner scrapped the practice amidst intense scrutiny.

Ironclad Industrial managing director Russell Byrne also sought access to the scheme and said it was entirely voluntary.

“As a small business it has been fantastic to us because its helped cover cash flow waiting for payments from other people,” he said.

“It is definitely going to affect us, how and how bad I don’t know at this stage but I’m trying to work out other ways and I’m looking at vendor financing and other things to try and help us but they charge more than double.”

Down the road, Karratha Contracting managing director Todd Mckay said his business was one of the first using the new scheme and it instantly improved relationships with his suppliers.

“We were on 45 [days] before that so we were really struggling to pay our suppliers. We lost accounts with people because of that reason," he said.

"It made it a hell of a lot easier, we freed up all our cash flow."