Late payments to micro-, small- and medium-sized enterprises are a key issue. SMEs report that they are the most important issue after access to finance as they don’t have the cash flow buffers of larger businesses. Data from BACS shows that in 2012 over £36.4bn was owed to over a million SMEs in late payments, with the average company owed approximately £36,000 at any one time. To put the problem into context in 2011 high street banks lent SMEs just over £56bn. Federation of Small Business surveys show that over half of SMEs are not paid promptly by large companies, with the average payment time being 58 days. Over the last year 158 million hours were lost by SMEs chasing overdue bills and 42 per cent of FSB members believe it is getting worse because contractors don’t see paying their suppliers late as being an issue. Although the private sector, and in particular the construction industry, is the worst sector for paying bills late, there is also a significant section of the public sector which also fails to pay promptly including local authorities and government departments.
The effects of late payments on SMEs can be catastrophic. And there is growing evidence that late payments are hurting the economic recovery as well. ONS data shows that SMEs make up 98 per cent of all organisations in the UK economy and 45 per cent of all employment, generating 46 per cent of the UK’s income from the private sector (£1,558bn). During the 2008 recession it is estimated that 4,000 businesses failed as a direct result of late payments. Although there are no official estimates of how many businesses have failed as a result of late payments while the economy has been flatlining, in 2012 the Forum for Private Business reported that over 124,000 SMEs were almost put out of business as a result of late payment. It was as a result of my constituents, Ann and Harry Long, telling me their story that I started the Be Fair – Pay on Time campaign in June 2011. They were owed over £150,000 and didn’t have the cash flow to keep going; after 35 years their local plumbing business went into administration. There are thousands of examples like this up and down the country.
Although Labour’s 1998 (updated in 2002) Late Payment of Commercial Debts Act enabled companies to claim interest and obtain compensation on overdue payments, fear of reprisals including being ‘blacklisted’ from contracts, has been cited as a reason that this legislation is not used more. Other tools such as the Prompt Payment Code, which commits signatories to pay suppliers promptly at every level in the supply chain, have also had mixed effects. Alarmingly, just before signing the PPC some large companies decided to increase their payment terms without negotiation or notice, in one case by up to three times previous payment terms! Last week Marks and Spencer told 500 general merchandise suppliers that they were increasing their payment terms from 60 days to 75 to ‘bring it in line with industry standards’. The EU Late Payment Directive (2013) which stipulates public authority-business invoices must be paid in 30 days and business-business invoices in 60 days, with debtors forced to pay interest and an administration fee, is the latest legislation to try to address this issue.
Until recently the government’s response had been woeful, failing to address my request to bring forward the implementation of the EU Late Payment Directive and to ensure that government contracts made sure all suppliers in the supply chain are paid promptly. Perhaps in response to my ‘Pay on Time’ campaign and a recent all-party parliamentary inquiry which I convened and chaired, the government seems to be taking this issue more seriously. But there are still key issues. The inquiry identified that fundamentally late payments are down to unethical business practice, a form of corporate bullying, because large companies have more power. This is down to the culture and leadership of these companies. Late payment needs to be seen by everyone as unethical as tax evasion. And for that we need government to show leadership as well.
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Debbie Abrahams is MP for Oldham East and Saddleworth, chair of the all-party inquiry into late payments, and winner of the Grassroot Diplomat Business Award (Late Payment Campaign), 2013. Read the inquiry report here and like the campaign on Facebook here
There is another, more subtle, point, which I think people are overlooking.
There is a tendency for firms (like utility companies) to suggest direct debits for payment of bills.
This may be a convenience for the firms (who might be able to cut hassle and staff costs) and for some customers, but those whose finances are not of the best can be very disadvantaged.
For example, my electricity supplier offers a 6 per cent discount for direct debit. Compared with what I would consider a normal basis for a cash payment (by the end of the month following the incurring of the charge), the later paying (ie, the non-direct debit paying) customer incurs, in effect, an interest charge of, say, 50 per cent APR (roughly, 6 per cent for six weeks = I per cent a week = 50 per cent per annum). If one considers normal payment would be three weeks after invoice, the effective charge would be double, ie 100 per cent APR.
This, I believe, is unfair. Moreover, if people are pressed into direct debits, it reduces the cash in the system and concentrates it into the hands of the payees – bigger businesses, generally, who have appeared reluctant to spend it on investment etc.
I am sorry this comment is late, and is not as well researched as I would like, but it may be worth more detailed consideration in the drive to protect consumers and to adjust the balance of advantage in their favour.