Small Firms left waiting for action as late payment increases

Written by Brian Cotter MP and published in Credit Today Magazine on Mon 1st Mar 2004

A new survey published by Experian has just revealed that the UK are the worst late payers in Europe, with most British companies paying bills around 27 days late, as compared to just 10 days in France, or 8 days in Sweden.

For smaller firms, late payment is something of a nightmare and business owners spend many a sleepless night worrying about their lack of cash flow as a result. The uncertainty about cash flow damages confidence and impedes growth within smaller firms, as well as adding to the cost of borrowing.

Shockingly, it is the larger companies that are financially stable, who are amongst the worst offenders. Despite the introduction of late payment legislation in 1998, which gave small firms the right to claim statutory interest on overdue invoices, the situation has only deteriorated. Larger companies are now taking over half a day longer to pay up than they were 6 months ago, taking an average of 78.5 days to settle their accounts. Although the performance of smaller firms has also deteriorated, they still have a better payment record than larger businesses, at 57 days.

One of the reasons the legislation may not be working is because many small businesses are reluctant to use the threat of statutory interest against late payers, for fear of losing important contracts. Eddie Morrison, Managing Director at Bank of Scotland Corporate Banking recently concluded that "many owner managers would view levying a late payment charge on a client as commercial suicide", after publishing a survey showing that almost half of small firms have been forced to take legal action against late or non-payers.

This leaves many businesses with no choice but to sit and wait until bigger businesses decide pay up. This has catastrophic results for many small firms and the financial information company, Dun and Bradstreet estimate that around 10,000 UK companies go bankrupt every year as a direct result of late payment.

Worse still, many larger companies are still flouting legislation which requires them to disclose the time its takes them to pay their commercial bills. The Federation of Small Businesses (FSB) estimates that just 30% of UK PLCs are meeting their legal duty to reveal payment records and are pressing the DTI to put pressure on Companies House to force the information out of secretive companies.

There are certain measures that small businesses can take in order to protect themselves from late paying clients. The Better Payment Practice Group (BPPG) has just published new research showing that 63% of companies do not bother to check the creditworthiness of new customers, which increases their risk of becoming victim to delayed payment.

In addition to practicing better credit management, some small firms are increasingly turning to intermediary factoring firms, who help them to chase up late payments and offer immediate cash advances on the value of outstanding invoices. Once the customer settles the invoice, the factoring company will take back what they are owed, plus a fee. Nonetheless, some small businesses are reluctant to use such an approach for fear of spoiling the close working relationship that many of them have with their suppliers.

In the end then, it is really up to the Government to take the definitive action that is is necessary to stop larger firms flexing their commercial muscles and delaying payment to smaller suppliers.

In this respect, the DTI must heed the FSB's warning and take tougher action against those corporations that fail to disclose details of their payment records. Nonetheless, the problem is such that the Government must go even further than this. If the threat of paying statutory interest has failed to act as an impetus for late payers to clean up their act, I believe that the threat of harming their commercial reputation would. This is why I am calling on Ministers to name and shame larger companies who persistently make late payments to suppliers, on an annual register. This would allow small firms to effectively judge the payment record of potential customers and make an informed decision before entering into business with them.

The FSB have already taken the lead in this respect and have been publishing a private sector payment performance table over the last four years. Nonetheless, with fewer plcs providing information about their payment practices, a tougher lead from Government could be just what is needed to bring the larger late payers into line.

Sadly for small businesses, it could be some time before the situation improves and it is little wonder that larger businesses are failing to toe the line, given that the Government are failing to lead by example.

All Government departments and agencies are currently required to settle their bills within thirty days, yet three years on from the foot and mouth disaster, a number of small contractors are still waiting to receive the £55 million they are owed by the Department of the Environment, Food and Rural Affairs (DEFRA), for work they carried out on behalf of the Government.

Ministers maintain that a number of the claims are fraudulent, yet investigations by the National Audit Office suggest that only 1% of contractors' bills have warranted fraud investigations. It appears that the majority of the contractors are simply hard working small business owners, who are now struggling to keep their businesses afloat as a result of Government delay. Thus, at the present time, it seems that the Government themselves may well be the UK's worst late payer.