Can new regulations right the wrongs of late payments?

By Max Goldbart, Monday 20 February 2017

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It is the bane of an SME’s life: late payments from a large customer can leave a smaller company in dire straits. For too long, it appears the government has sat back and allowed the big companies contracting out work to SMEs to get away with paying late by up to – and beyond – 90 days.


Late payments affect small companies, but they are by no means a small problem. According to figures from the Department for Business, Energy and Industrial Strategy (BEIS), SMEs are currently owed £26.3bn in overdue payments. The Federation of Small Businesses (FSB), which represents the interests of the UK’s SMEs, believes 50,000 “business deaths” a year could be avoided if payments were made promptly, adding £2.5bn to the UK economy. 

Finally, after years of pressure, it looks like something is being done, as BEIS prepares to launch its Duty to Report, enforcing a regulation to introduce a duty on the UK’s large companies and LLPs to report on a half-yearly basis on payment practices [see boxout]. 

“If you talk to FSB members who haven’t been paid on time and have gone bust, that sort of experience, the emotional impact is just as distressing as someone who has been mis-sold a product,” explains FSB policy advisor Ben Baruch, who has had a hand in informing government policy on the matter. 

“The Duty to Report is something that the FSB has been very supportive of and has engaged both industry and government for quite a few years now. We’re pleased with the guidance and think it has provided a lot of clarity in some areas, which is quite important as well in order for the regulations to be a success. 

“The next challenge is the implementation of this to make sure that large businesses understand their responsibilities around compliance and can hit the ground running from April 2017.”

What about us?

Word from the sector is that print is an especial sufferer from poor payment practices. With such a large proportion of SMEs carrying lengthy creditors’ lists, a late payment from a debtor that needs to be passed straight to a creditor can land a company in deep water. 

“Print in particular has a generic problem with aged-debt, which we all know about, I’m afraid,” says Ian Carrotte, who heads up print community credit outfit ICSM. 

“The word that would describe many in the print industry is ‘desperate’. Profit margins are so tight that they have to have work, presses have got to run; they are desperate to work and they feel they have to bend over backwards for the customer.”

Carrotte admires the Duty to Report in theory, describing SMEs as the “engine room” of the economy, but he has multiple questions over its effectiveness: what will be the punishment for those failing to comply? Who will verify the stats, and will they be challengeable? 

He says: “It sounds a bit like the late payment statute,” which is intended to enable firms to charge ‘statutory’ interest if a supplier is late with a payment. “Great in principle but no one uses it except when they sue, and that defeats the object,” he adds.

Sidney Bobb, chair of the British Association for Print & Communication (BAPC), sees the problem being that the vast majority of printers are so much smaller than their customers. 

“It’s no different to any other blue-collar industry living in a white-collar world. In our industry a lot of large companies hide behind the formality of their orders,” he says. 

As a chartered accountant and chair of the BPIF’s government and industry committee, Pinstripe Print’s managing director, Nigel Lyon, is unsurprisingly fully up to speed on the government’s late payments plan.

Lyon fears for the weakness of the new regulations, believing they will lead to a situation where the government is simply watching over big businesses “marking their own homework”. 

“In Europe they pay very promptly indeed, but the UK seems to have got into this world of being delighted at increasing, or having lots of, credit,” he says. 

SMEs can also find themselves in situations where UK subsidiaries of larger foreign companies take advantage of foreign contract terms, so a UK subsidiary of a US multinational, for example, may have 120-day payment terms hidden within a contract. 

Lyon elaborates: “If everybody was in a situation where they say ‘Look you pay your creditors in 30 days and they’ll pay you’ then that would be fine, but many businesses wouldn’t be in a situation to do that because they are relying on the difference to be able to pay their creditors late and collect their monies a bit earlier.”

But Baruch and the FSB are remaining positive. The FSB has suggested a number of ways in which the government can use data to hold companies to account, potentially by integrating data with accountancy software packages so that small businesses can view the data before entering into a contract, or finding a way the data can be channeled into Companies House.

There is also the appointment of the UK’s first small business commissioner coming up later this year, whose job will be solely to focus on these issues, and the FSB is going further, pushing for a non-executive director of all large companies to have a statutory duty to represent the interests of small businesses. 

“UK business culture has accepted this as being part of business. The regulations could always go further but the very fact that we have the legislation is a positive thing,” finishes Baruch, with conviction.

The Duty to Report explained 

The government’s new Duty to Report enforces a regulation made under Section 3 of the Small Business, Enterprise and Employment Act 2015. 

From 6 April 2017, It introduces a duty on large companies to report on a half-yearly basis on payment practices, policies and performance, with data ready to be published from October. 

The data will be published on an as-yet-undeveloped government portal, and will comprise information such as the average number of days taken to make payments and the percentage of payments not paid within agreed terms during that six-month period.

Companies must file a report on all qualifying contracts if they have met two of these three requirements on their last two balance sheets: turnover of £36m or more, an £18m-plus total balance sheet or minimum 250 staff. Parent companies must report if they meet these requirements or if the aggregate figure for their group meets them. 

Failure to publish a report within the 30-day filing period or publishing misinformation is punishable on summary conviction by a fine. 

Newly-formed and newly-merged companies need not file in their first financial year.


Big firms will be looking at ways to get around regs

ian-cassIan Cass, managing director, Forum of Private Business (FPB)

The FPB created a ‘Hall of Shame’ to name and shame companies whose late payment practices were affecting our members before the Enterprise Act and plans for the small business commissioner were put in place. 

I think that the issues we brought to light had an impact on the act and controls the government is now introducing. We have a strong interest in looking after forum members’ interests, so we’re encouraging members to tell us where they’ve had problems caused by the poor behaviour of their larger business customers.

Toothless commissioner

The small business commissioner has no teeth, in terms of penalising late payment, other than writing a strong letter, so it will be interesting to see how it works in practice. Publishing companies’ payment performance is an interesting development but I suspect that even now, corporate lawyers and finance departments in large companies are looking at ways to get round this.

If a business has paid out money up front to fulfil an order or deliver a service then late payment can cause a real problem to your cashflow. In the print business you may have paid in advance for ink, paper, postage, tangible things, and then you have to wait over three months to get that money back into the business. That’s a problem.

They say turnover is vanity and profit is sanity, well, cashflow is reality, a small business with a £15,000 or £20,000 outstanding invoice, where you’ve paid out money in advance to fulfil the order, can really put a business in dire straits. This needs addressing, but I have little faith in the big multinationals changing their behaviour, a number of them know what they’re doing, it’s pre-meditated behaviour – it’s not illegal but it’s pretty unethical. They play it right to the wire for their own commercial advantage and gain, at the expense of their smaller suppliers.


Does the industry ha ve a problem with late payments?

keith-ryanKeith D’Arcy Ryan, managing director, Copy Color 

“We’re relatively fortunate in that if I take our top-five clients, they are actually very good at paying, but this is a bit of a rarity. Although we do have others that are very bad at paying we do work so regularly for them that once we get over the initial hurdle we see a payment every month. I do still believe that as a general rule we have a problem with late payments. I know many businesses that have been decent and failed because of cashflow.”

bridget-pettyBridget Petty, commercial director, JPS Print

“Our financial controller is fair but firm, she stays in close contact with clients to ensure timely payments. It is crucial that we pay all our suppliers on time to safeguard a good credit rating and maintain our reputation and access to a broad supplier base. A great deal of financial goodwill comes from relationships built up over years, prompt payments to suppliers and working with likeminded clients. Legislation that stops larger firms over-stepping agreed terms will benefit everyone; keeping money moving is fundamental to a successful economy.”

singhGurdev Singh, managing director, Northwolds 

“I think it’s a huge issue, without a doubt, the larger the companies the longer they take to pay. I must admit we have a tremendous relationship with the paper companies so we’ll pay anything between 45 and 60 days. I’d like to see people pay for paper upfront as standard practice because I think that would resolve a lot of issues but that isn’t going to happen. If I could get clients to pay for materials upfront, then that would take away a lot of the risk.” 

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