In a bid to counter the seemingly inexorable increase in late payments which is stunting the UK economy and threatening the very existence of SMEs, the business secretary Vince Cable is set to shame big businesses into paying suppliers on time.
Endangering the health of small businesses
The level of outstanding late payments for SMEs has reached £40bn this year, up a staggering 25 percent on last year and exceeding the previous high of £37bn in 2012.
Many small businesses find themselves between a rock and a hard place in respect to late payers. Contracts with large corporations are often their chief source of revenue, so small businesses often offer generous payments terms of between 60 and 90 days to win and maintain these contracts
The prompt payment code
Since its introduction, the prompt payment code has attracted 1,500 signatories, representing some 60 percent of the UK’s supply chain. Although this is a positive start, there are still significant gaps created by companies that are unwilling to put their signature to the voluntary code.
One method SMEs can use to check the payment history of companies unwilling to sign the code is to use this free company checking tool: a resource which is offered by a number of companies, the link taking you to one such provider that we recommend – RM Online. This allows SMEs to scour the track records of larger corporations for the telltale signs of late payments before agreeing to supply their products or services.
Shying away from tougher measures
Making it compulsory for companies to publish information about their payment terms may be a step in the right direction, but many SMEs don’t feel it’s anything like enough.
There have been discussions about implementing tougher measures such as fines, or naming and shaming companies that do not make their payments on time. One approach that has been agreed is the incorporation of an online rating system into the prompt payment code, which will help to highlight late payers. The government is currently working with the Institute of Credit Management to introduce this change.
Calls for to make the code compulsory
One of the most popular recommendations from business leaders is to make the prompt payment code a statutory requirement. The test of the code’s success will be whether businesses start to make payments within 60 days. In theory, corporations should already be making payments within this time period under an EU directive. In reality, this is simply not the case.
While one of the most powerful methods of redress is to charge interest on late payments, a strategy that has been open to SMEs since 1998, many suppliers are reluctant to use this approach as it might upset powerful and potentially big spending clients.
About the Author:
Darren Levine is a keen financial blogger and small business owner in Newcastle. When not calling the shots at his distribution company, Darren can be found tapping away at his computer to produce informative articles for some of the UK’s most authoritative sites.