28 March, 2024

Government to crack down on late payment culture

06 March, 2015

BFPA CEO Chris Buxton reports on current steps being taken by UK Government to address the cultural malaise of late payment and the role being played by the BFPA.


Anyone who has spent any amount of time in a customer supplier relationship has encountered it – late payment of bills. We’ve all heard the phrase; “The cheques in the post – haven’t you received it yet?” Another favourite trick is to query the most trivial of details and to use it as an excuse not to pay what is often a very substantial invoice. Let’s be clear from the out-set; late payment of bills is not a clever strategic initiative to improve cash-flow – it’s a crude, un-ethical breach of contract. It can have devastating effects upon totally innocent parties and reverberate all the way down the supply chain. It doesn’t matter how those that do it want to ‘dress it up’ – it’s just plain wrong.

Late payment is not a new issue but the problem has worsened since the financial crisis of 2009 and particularly affects small and medium sized firms. Between 2008 and 2012, the overall level of late payments due to these businesses almost doubled from £18.6 billion to £35.3 billion. As of February 2013, the overall level of late payment owed to small and medium sized businesses stood at £30.1 billion – an improvement on 2012, but well above pre-2008 levels. The average amount owed to a small business stood at £31,000 and 85 per cent said they had received a late payment.

It doesn’t require a PhD in Economics to appreciate the negative effect that this kind of culture has on UK GDP and in particular, those companies that tend to be SME’s in the ‘middle’ of the supply chain – exactly where most BFPA members operate. That is why the BFPA, along with sister associations in the Engineering & Machinery Alliance (EAMA), have been working with other stakeholders such as the British Bankers Association and Government departments to try and address the problem. 2014 saw us engage in government consultations on the subject, the associated research from which showed that:-

• Small businesses on average spend 130 hours each year chasing late payments, which equates to just over three weeks of work, at an average cost of £1500 per business.

• 34 per cent of companies report that they have sought external finance to cover gaps in cash flow caused by late payment. The Federation of Small Businesses states that this has led to £180 million in debt interest charges – money that could otherwise be used for investment and growth.

• In 2011 124,100 businesses were almost put out of business due to their customers paying late. In 2008, 4000 UK businesses became insolvent as a direct consequence of late payment.

• Good cash-flow is vital in enabling businesses to continue to raise finance and invest when required and late payment has a major negative impact on businesses ability to access finance. According to Professor Russel Griggs, the independent external review of the major banks’ Appeals Process, in 2012/2013 48 per cent of declined finance applications over £25,000 were rejected on ‘affordability’ grounds – the ability of an SME to service the debt from its existing cash-flow.

As we go into 2015 the Government is introducing measures to encourage prompt payment by obliging bigger companies to publicly report their payment performance. These measures formed an important part of the Small Business Enterprise and Employment Bill and government has said that it will consult with industry on the best way to address it. BFPA is at the heart of those consultations and is encouraging a ‘name and shame’ policy. Conversations with members reveal a great deal of support for what we are doing.

The details of exactly how these measures will be implemented is still under discussion and great care is being taken not to undo all the good work that has been done to reduce the regulatory and administrative burden on UK companies at all levels – but the current culture has to change. The current view is that if the large tier one companies can be encouraged to improve their performance through a mixture of ‘carrot and stick’ regulation, the improvement will ‘ripple-down’ the supply chain and improve performance at all levels.

As Vince Cable, Secretary of State for Business Innovation & Skills stated; “Some of the options [being] explored are quite radical, and I make no apology for that – the importance of the issue demands it!”

www.bfpa.co.uk




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