Article The changing value of money

How big business bullies its suppliers into lending

Late payment is a major problem for freelancers and small firms and it seems to be getting worse. Big businesses are effectively banking with their suppliers’ money - so will government step in?

For freelancers and small businesses, late payment is an all too common scenario. You hunt down the work, pitch your business, make a deal, fulfil your end of the agreement and fire out the invoice, but then, nothing. Thirty days passes and still no payment. Reminders are sent, conversations had, but still the client hasn’t paid. When the money finally arrives it’s weeks, if not months, overdue and the whole episode has left a sour taste in your mouth. Unfortunately, laws designed to tackle late payment are weak and fail to prevent poor practices. Big businesses know this all too well and play the system to its maximum. Late payment is not only unfair and irritating for small businesses, it also weakens the UK economy by hampering business growth. Yet so far, governments have been reluctant to do much about it.

Late payment has long been an issue, but during the recession it became worse. Research carried out by the payment company BACS showed the tally owed to small business had soared to over £30bn, and that over one million businesses were affected. Yet as those who have been on the receiving end know, there is little remedy for the problem.

The previous Labour government introduced The Late Payment of Commercial Debt (Interest) Act, which enabled businesses to charge interest on overdue invoices. However, many businesses do not wish to use this rather lawyerly idea for fear of upsetting relationships with clients, who they have often worked hard to obtain. Other ways to collect late payments include filing for County Court Judgments (CCJs), or even a winding up petition, which can force a company to pay up or be shutdown. But these are both nuclear options, which a business would only realistically undertake if they were prepared to forsake a relationship.

Big businesses have the upper hand, it would appear, and use their muscle when negotiating contracts. “Bigger companies frequently dictate payment terms that are punitive and mean,” says Jon Priest, CEO of market research business Spa Thinking. “In effect, these giants are banking with the UK’s SMEs and micro business’ money. It’s a serious issue and needs more exposure.”

Darren Fell, managing director of Crunch Accounting, a Brighton-based accountancy firm, is another who feels the bigger companies are lording it over smaller firms. “Late payments are the killer of all small businesses, and often the worst culprits are the biggest corporates.”
Businesses are calling for stronger legislation, and among the ideas are mandatory payment terms and an ability to privately name and shame companies that abuse their suppliers. So what is the government actually doing?

Business Minister Michael Fallon appears to be sensitive to the issue, and was even quoted in the Daily Telegraph as “going to war” on late payment. The government also plans to bring into force a Small Business, Enterprise and Employment Act this Parliament. So far, though, it has only said it intends for there to be greater transparency regarding the payment practices of businesses. Instead, the government is urging businesses to sign up to the voluntary Prompt Payment Code (PPC), which stipulates that businesses be paid on time. But the PPC is proving to be of little use, as it provides no sanctions to those who breach its rules, or to those who refuse to sign it. Many big businesses have signed up to the code, but cynics might wonder if this is little more than a ruse to avoid the mandatory measures many firms are calling for. Arnab Dutt, owner of manufacturing company Texane, is scathing of government measures to date. “So far, nothing the government has done in terms of legislation has seriously impacted this disgraceful scenario.”

What should be done about it? One option is to introduce mandatory payment terms for all businesses. However, several business lobby groups oppose such a move. The Confederation of British Industry (CBI) says compulsion wouldn’t work. It says that supply chains are, by their nature, international and based on collaboration, and that larger firms might just choose to cut out UK suppliers. The CBI insists on aiming for cultural change, instead. It wants more honesty from businesses about payment terms and has faith in the PPC as a way forward. Meanwhile, the Forum for Private Business (FPB) describes the idea of fixed terms as being “draconian”. Both groups argue businesses must be free to negotiate contracts and neither want legislation. Yet entrepreneurs who face late payment are open to ideas which would force clients to pay on time. “It’s so massively unfair that I feel there should be legislative guidelines put in place,” says Priest, “something that says for B2B services procured there should be a mandatory payment window linked to how big the client is.”

Another option is for an ombudsman to be created who businesses could approach in private about late payment grievances. After investigation, these businesses could be “named and shamed” and potentially face other penalties, such as being removed from government tendering lists. Indeed, naming and shaming is one tactic which groups such as the FPB are independently undertaking. However, the FPB’s ‘Hall of Shame’, which has included names such as Boots, Monsoon, Accessorize, GlaxoSmithKline, Sainsburys, Debenhams and Mars UK, seems to be turning into a long list of very well-known companies.

The idea of naming and shaming was also taken up by business secretary Vince Cable. He envisaged a ‘TripAdvisor’ type model and also said businesses should publish their payment terms. Greater transparency was once again the key, he suggested. However, despite an emphasis on transparency for some time now, the problem appears to be getting worse, not better. After all, even if a business is publicly shamed - so what? Will suppliers suddenly refuse their order, or will the public boycott their goods? The answer is, of course, no. Big businesses will simply put out a statement of intent, make a few tweaks and then carry on as business as usual. The culture of late payment will take some tackling yet.

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