In this interview with GTNews, Mike Cherry, chairman of the UK’s Federation of Small Businesses (FSB) outlines the financial impact on small to medium enterprises (SMEs) posed by the growing problem of late payments.
How big a problem does late payment present to smaller businesses? Has it increased significantly over the period since the 2008 global financial crisis?
A (Mike Cherry): In 2008, £18.6bn was owed in late payments in the UK – but this figure continues to rise and has now more than doubled to reach £46.1bn in 2014. This reflects a wider cultural trend among many large companies, where they use late payment terms to improve their own cash flow and margins, at the expense of their small suppliers.
For any small business, late payment has the potential to be a millstone round their necks that holds back growth and seriously impacts their finances. In May 2011, a third of our members had written off invoices, and a fifth had each written off more than £5,000. The loss of funds is compounded by the additional business cost from the time spent chasing these payments: A quarter of our members spend three hours or more chasing late payments, which is an unacceptable waste of resources for them.
Do reports from your members suggest that the problem of late payments is particularly bad in specific sectors, or is it across the board?
In 2014, our members told us in our Voice of Small Business survey that by far the worst offenders for late payment tended to be larger private sector companies, who on average paid suppliers late 51% of the time. However, the problem exists across the board. No business should have to wait over 30 days for payment.
Have larger companies become adept at assessing how long they can hold off paying without actually pushing the small firms that supply them into insolvency?
There are a number of different tricks that companies have learned, which enables them to play the system and avoid repercussions for paying late. For example, if the company waits until close to the payment date before challenging an invoice, the clock on the agreed payment terms is reset and they can avoid paying even longer. Some large companies are also known to change the payment terms in their contracts retrospectively to enable them to pay later and small firms are often too scared of losing business to complain.
Does the FSB liaise with other small business associations, such as the National Federation of Independent Business (NFIB) in the US? Do any countries have best practice standards regarding payments to suppliers that the UK could usefully adopt?
There is often a cultural divide that exists internationally on the subject of late payments, particularly in the US where late payment to small businesses is so common that it is expected and something small businesses factor in. The FSB works for the interests of UK firms, but there is work to be done to make sure that fairness is applied across markets. The European Union enacted the Late Payment Directive in 2011, which came into UK law in 2013 and ensured that large businesses spell out their payment terms. However the 60 day payment benchmark that this directive sets has been widely ignored by many companies, as evidenced by the ongoing late payments scandal.
The directive has also been applied differently across the EU, and in the UK it is becoming clear that the way the directive has been interpreted continues to leave payment terms at risk of abuse. The principle behind this directive should be restated, and be used by the Prompt Payment Council and companies themselves who should explain why their terms extend beyond 60 days.
The problems recently experienced by (British supermarket multinational) Tesco uncovered questionable practices imposed by several UK retailers on their suppliers? Are you hopeful that these will now be abandoned and smaller firms will get a fairer deal in future?
The government has tried to stamp out late payment through the Prompt Payment Code. But it’s clear that a voluntary solution is not enough to deal with unscrupulous businesses. We want a much stricter Code that incorporates both sanctions and redress. For example, membership of the code should be a prerequisite for those wishing to bid for government contracts, they should report average payment times and be forced to leave if they fail to meet a basic 60 day payment standard. We are currently in discussions with the government on many of these points and we are hopeful that we will see firm progress soon.
The UK government was recently criticised by the National Audit Office for not honouring its own commitment to pay SMEs promptly? Can – and should – governments be doing more to assist SMEs?
We believe that the government should be leading from the front when it comes to prompt payment, in order to improve the wider payment culture. The government has certainly raised its game in recent years, and we welcome its adoption of a commitment to pay suppliers within 30 days, but there is more that it could do with its influence. For example, we would like to see the reporting requirements in the Small Business Bill compel businesses to explain why they extend their payment terms. The FSB believes that the 60 days stipulated in the EU Late Payments Directive should be treated as an absolute maximum term, beyond which payments cannot be deemed prompt.
What options are available to businesses in the form of insurance and other coverage to mitigate the effects of late payment?
There is no form of insurance that can protect small businesses from late payment, largely because it is so difficult to estimate the costs for all of the firms involved. The most obvious victim is the supplier who isn’t paid, but further down the line are the firms who supply the victim and rely on that money to pay for their services too. In this way, late payment can have a knock-on effect on a huge number of businesses not connected to the original contract.
Are there other actions that small firms and their treasury departments can take in response?
Since 2013 it has been a legal right for companies to charge interest on payments later than 30 days in the public sector, and 60 days in the private sector. A small business can also charge additional fees to cover recovery costs, if they exceed the amount paid. However, while large businesses may be able to absorb this burden, small firms often do not have the time or resources to pursue a lengthy claim and may simply choose to write off the debt. Some businesses are also afraid to tackle their most important customers on late payment for fear that they may lose this business in future.
The most effective way to stamp out late payment is to bring about a change in payment culture as a whole. Small businesses can help to do this by reporting instances of late payment whenever they find it, and putting pressure on the Government to legislate on behalf of the law-abiding majority. Large firms should go to banks and alternative finance providers and should not use small businesses as a means to manage their cashflow.
Are there any further issues that we haven’t yet covered and on which you would like to comment?
Late payment is just one of several problems that fall under the umbrella of ‘supply chain bullying’, and cause real financial problems for small businesses. Other examples of this are so-called ‘pay to stay’ fees, in which small firms are charged sums of money to retain contracts under threat of losing the business. This practice has been uncovered in huge companies such as Premier Foods and WH Smith, who reportedly demanded £2,000 from a publisher for their magazine to stay on its shelves.
All forms of supply chain bullying are unacceptable, often amounting to little more than blackmail of small firms who don’t have the power to fight back. A message needs to reach big companies that they can’t get away with squeezing their suppliers in this way.
In the world of payment processing, treasurers and finance managers have benefited significantly from faster, more secure systems that have allowed for leaner and more progressive business processes. However, the waves of regulations in financial markets have led to tighter and stricter procedures.
The first half of 2018 sees the implementation of two major pieces of regulation – the Payment Services Directive (PSD2, which went live in January 2018) and the General Data Protection Regulation (GDPR, going live in May 2018), both laying important foundations to pave the way for a better and brighter digital economy.
SWIFT gpi is tipped to become the universal cross-border payment standard, writes Paula Roels, Deutsche Bank.
Dov Goldman of Opus, outlined exactly how the concealed Uber breach came about, what GDPR would have thought and how big businesses ... read more