“That is why we are shortening our payment terms to less than three weeks in order to further strengthen our partnership with smaller Australian suppliers, that are a vital part of Rio’s supply chain,” he said.
The new policy will also expand Rio Tinto’s definition of small suppliers from being those who supply up to $1 million of goods and services to those with an annual turnover of up to $10 million.
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 a small percentage off to receive the money earlier than the standard payment 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 come under increased scrutiny since last year.
The other form, 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.
Both methods have come under increased scrutiny because their implementation is usually accompanied by lengthening payment terms, and analysts are concerned they could be used to hide weak cash positions.
These concerns prompted big companies such as Rio Tinto and Telstra to scrap the practice last week. Telstra has also decided to drop its payment terms to 20 days.
But Rio Tinto’s decision to scrap the scheme has thrown a spanner in the works for several of its Pilbara suppliers, who say it benefited them and called on the miner to reintroduce the.