Dairy heavyweight Fonterra is to start paying its small trades and services suppliers on normal business terms again, reversing a delayed payment policy which caused financial difficulties and was slammed as "a public relations disaster".

First news of the U-turn by New Zealand's largest company came from Small Business Minister Stuart Nash, who congratulated the farmer-owned cooperative on its change of policy around payment terms for small and medium suppliers.

Nash said he had personally raised the late payment issue with Fonterra after hearing some businesses were waiting up to three months for payment.

He revealed Fonterra had adopted a policy where suppliers whose contracts were worth up to $300,000 a year would be paid on the 20th of the following month.

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Fonterra, which has revenue of about $12.4 billion a year, introduced the delayed payment policy during the milk price downturn.

Specialist dairy sector accountant and Morrinsville Chamber of Commerce chairman Nigel McWilliam said the policy had been "very tough" on provincial areas and businesses, with medium-sized businesses forced to pass the squeeze onto smaller, one-person business operations.

"Local businesses were doing it tough because dairy farmers were and then they started doing it tough from Fonterra itself. It certainly affected this town from a cashflow perspective pretty dramatically.

"We're pleased they're back on normal terms. Large businesses should be showing how it's done and being leading lights on commercial and business practices by showing best practice."

McWilliam said for Fonterra, the move had been a false economy.

He suggested Fonterra had felt "the burden" of cheaper service and materials as suppliers tried to adapt to the income squeeze.

"That's never mind the public relations disaster. I had [dairy] farming clients in here quite embarrassed how their plumber was being squeezed by their own company."

A Fonterra spokesperson said in a statement the company's "teams had been quietly working with our smaller vendors on a one-to-one basis to move them to shorter payment terms".