Government details plans to tackle late payments to SME

Late payment from customers to suppliers is an ongoing problem that can have severe consequences for small businesses. Not being paid on time hurts companies financially because it creates cashflow issues that are sometimes impossible to recover from.

Many small businesses are still folding because of their customers’ reluctance to pay what they owe on time. Even in less dire scenarios, it can stunt growth by preventing firms from investing in new equipment or hiring new staff.

Following a consultation with businesses, trade bodies and professional associations, the Department for Business Innovation & Skills (BIS) has set out proposals to help address the problem of late payments to SMEs. 

The results of the consultation, published on 30 May, outline the proposals and reveal that 85% of small businesses have experienced late payment in the past two years.

“The majority of printers are victims of late payments and I think they are partly to blame themselves in as far as they are afraid to push for payment,” says Ian Carrotte, chief executive of print credit checking firm ICSM.

“Printers are not strong enough with their credit management on the whole. Those that have a strict credit control regime are generally speaking healthy companies and those that don’t are not well.”

Kathy Woodward, chief executive of the BPIF, agrees: “I think the way to resolve the issue is for firms to make getting payment a priority. Everybody prioritises getting the sale in but not everybody has the same focus on some of the administrative backroom activities,” she says.

The consultation was carried out to ask what the government, businesses and other stakeholders could do to build an environment where businesses treat their suppliers fairly, and accept their obligation to pay what they owe on time.

Business secretary Vince Cable says the government will make it compulsory for large companies to publish information about their payment terms in order to improve transparency and highlight good and bad payment practices, forcing those who are not playing fair to change their behaviour.

The government also plans to strengthen the Prompt Payment Code by increasing awareness of it and encouraging more organisations to sign up to this best practice guide, which requires signatories to pay their suppliers within clearly defined terms. Also key to encouraging more responsible behaviour will be making the public sector a “beacon of best practice”, said the government.

The government has not, however, proposed to introduce a statutory maximum payment term for paying suppliers in the report, a move that has been met with mixed reactions among SMEs and leading print industry figures.

“I think that the government should have introduced a maximum payment term. 40-45 days would be reasonable and sensible I think,” says Carrotte. 

Crucial cash

Gillian Wilde, credit controller at Cheshire-based printers DXG Media, says: “I do think that maximum payment terms should be introduced because I think it’s paramount to cashflow. You need to have that information so that you can have maximum control over your cash.

“We don’t really have that many late payments. The main area where it affects us is that we use invoice discounting, so if payments are late we get penalised for that through our discounting company. This obviously has an effect on the amount of cash that we’re able to draw down and therefore has an effect on the company.” 

But if the current payment climate in print is anything to go by, not all would be in favour of a statutory maximum payment term. Currently firms are able to charge 8% interest on a late payment after 60 days. But a fair few SMEs are currently willing to accept late payment to keep large, prestigious customers on their books, leading to many large businesses abusing their power.

“Who is really going to be prepared to lose a key customer relationship to whistleblow on these late payment practices, other than the guys that go out of business?” asks Woodward.

Paul Fox, director at Graphic Station, says: “You want to work for the big companies as you want it on your CV, so you have to deal with late payment from them. Most of our customers do pay on time, but we have had to chase a couple of people up.”

Hopefully increased transparency of reporting payment practices may help to resolve this stalemate, with many large firms keen to be seen to take the moral high ground. But short of legislating a maximum payment term, which is a controversial option that people feel very differently about, it seems that late payment is a problem unlikely to go away entirely any time soon.

Opinion: Change is needed but fixed terms are not the answer

alexander-jackmanAlexander Jackman, head of policy, The Forum of Private Business

The proposals are incremental steps that are going to be helpful. The move to make large companies report on their average payment terms and times in their annual report will give more transparency. These businesses can be compared and be held accountable by shareholders. 

We’re seeing a lot of companies extending payment terms and their justification for doing that is falling in line with industry average. There’s absolutely nowhere that you can find a definition of what an industry average might be so we need to get the figures out into the open so we can hold companies to account for doing that.

There’s also some good stuff in the report about strengthening the Prompt Payment Code, although it’s quite an imprecise recommendation. Just that the government is going to take more consultation with businesses as to what that looks like. 

For us, though, the government’s report has ducked quite a big issue. A piece of EU legislation came in last year that placed an obligation on every member state government to put in place a system where businesses can complain about suppliers anonymously. That hasn’t been met here and if you want to have more late payment challenged by supply chains or groups like ours, then you need to be able to guarantee the anonymity of the business involved.

I do think that insisting no business can have payment terms longer than 60 days would be quite draconian. I can see the attractiveness of it, but there are so many existing relationships in business at the moment that are longer than 60 days – it would be bound to cause problems. Many businesses are used to getting paid in 120 days and work quite fine with it. We want to prioritise stopping the slippage of payment terms rather than trying to legislate a maximum payment term.”

Reader reaction: What do you think of the proposals on late payments?

kevin-marksKevin Marks, managing director, Phase Print

“We’re victims of late payment sometimes. It costs us financially because we have to find the money to pay all our suppliers so it does have a financial burden. There’s also a time burden of chasing stuff up. Ideally it would be nice if everyone could pay within 30 days. 60 days is acceptable and 90 days-plus is totally unreasonable. Publishing the payment details is a good idea because a lot of these big companies are very conscious of their public image.”

Chris Cooper, managing director, Hampton Printing 

chris-cooper“I agree with the principle of what the government is proposing and I think there’s no reason that clients shouldn’t pay within 45 to 60 days. We have a very strong blue-chip client base whose ethics are to pay their suppliers quickly. The companies that we deal with take the attitude that they want their suppliers on board. I’ve been a strong believer that if you want to borrow money you should borrow from a bank and not a printing company.”

Karl Smith, managing director, Technique Print Group

karl-smith“Late payment affects everyone. Cashflow is king and we do operate an invoice discounting facility, which costs us money. We could manage without it if we had the money in upfront quickly. Most of our customers do pay within 40-45 days, but I do get annoyed with some of the larger businesses that dictate when you’re going to get paid. There should be a law that enables you to charge anybody who pays late a fee, which they should be required to pay.”

Five tips to encourage prompt payment 

  1. Always lay out clear payment terms in writing and get them signed by customers. They should include the length of time the credit will last and a clause outlining the company’s right to charge interest for late payment 
  2. Invoices should be sent quickly and efficiently, with a breakdown of all costs, dates and details of the product. A statement detailing the amount owing and the due date should be sent as soon as possible after the end of the stated payment date
  3. If this fails, send a polite first reminder letter to show that you are keeping an eye on the debt. A stern approach may deter customers from doing future business with you
  4. A telephone call to the person the invoices have been sent to is the next step and then a final reminder letter
  5. Only take legal action against debtors as a last resort. If a late payment is likely to put your business at risk then it is crucial to get the money back