Charlie Elphicke: Big businesses should pay small businesses on time

Charlie Elphicke is the Member of Parliament for Dover and Deal. Follow Charlie on Twitter.

Late payment is a big issue for small businesses. It costs jobs. It drives companies under. It harms growth. My last article looked at steps the Government is taking to get the public sector paying on time. In this article I am focussing on what more can be done to get the private sector, especially big businesses, paying on time. It’s a good move for the Government to ask big businesses to sign up to a voluntary code, yet further action should be taken.

For example, and as I argue in detail below: reform the Late Payment of Commercial Debts Regulations, tighten up the Prompt Payment Code so signatories must pay within 60 days and, more radically, set up a “Bank of Prompt Payment” to chase big businesses for late payments without repercussions on small businesses.

Small businesses need to maintain cash flow in order to stay afloat. They lack the cash reserves which big businesses have. So it’s a real concern when large businesses fail to pay smaller businesses on time. In the most recent Federation of Small Businesses (FSB) survey, 57% of small businesses reported late payments from other businesses. This was almost double the previous survey which showed 34% of small businesses suffering late payments from other businesses.  More importantly, the figure was 60% when it came to big businesses.

The Government, as suggested by the FSB, is encouraging big businesses to sign up to the Prompt Payment Code. It is using the threat of naming and shaming to encourage businesses to join, and it has had real success with this campaign. Over 75% of the FTSE 100 have signed up to the code, and the number of FTSE 350 companies signed up has tripled.

Yet the Prompt Payment Code is no silver bullet - especially as signatories only have to pay within the time period set out in the contract. This has led to stories of big businesses which are Prompt Payment Code signatories, including long payment periods in their contracts. One company is said to have introduced 120 day payment terms in their contracts. That’s four months. Firms are able to access payments earlier than this, but are subject to a fee. Such moves may be within the letter of the Code, yet are clearly against its spirit and are totally unacceptable.

So what further action could the Department for Business take? Regulations aren’t the answer as many small businesses won’t speak out for fear of being blacklisted from further work. Non-regulatory proposals include:

• Reform the Late Payment of Commercial Debts Regulations 2013 - This regulation states that where the purchaser is a private business, the payment period cannot exceed 60 days except when agreed and not grossly unfair to the supplier. This concept of grossly unfair is open to endless interpretation, and won’t be clarified until some cases are tested in law. Given most small businesses fear to speak out, that’s not likely to happen any time soon. It would be better to make payment terms 60 days flat – failing that it should be “60 days, except when agreed and not more than 90 days under any circumstances”. Being clearer and sending a strong social message to businesses will make a real difference to getting small businesses paid on time.

• Tighten up the Prompt Payment Code – Allied to the above reform, the Code should provide for signatories to agree to supplier payment within 60 days. This would stop 120 day companies playing the system to make the incredible claim that they are prompt payers. Signatories to the Code could also be required to pay their suppliers electronically. Not only would this save money, it would put a stop to the “cheque’s in the post” game.

• Introduce a “Bank of Prompt Payment” – The Government plans to set up a new Business Bank.  Some doubt the wisdom of this idea, fearing it could end up becoming the Bank of Bad Debt. It could however usefully be engaged in invoice factoring. This would ensure that small businesses get paid quickly. Meanwhile the Business Bank could aggregate invoices and press larger businesses for fairly substantial amounts without being too bothered about upsetting the large businesses concerned. The invoices would be factored at a very low discount rate and help stop small businesses fearing they will be picked off and victimised by big businesses when they challenge late payments.

To support small businesses is to support our economy and economic growth. 6 out of 10 business jobs in this country are in small business. Moreover they are the job creators too, having created some 2 million jobs over the past decade. A decade in which large businesses have not increased employment. So to support small business is to support more jobs and money. This is why prompt payment matters. Ensuring that big businesses pay their suppliers on time, we will help drive economic growth, jobs and money.