The Government should introduce a tougher regime to tackle larger companies who treat small businesses ‘disgracefully’ by enforcing long payment terms or paying their suppliers late, says the Business, Energy and Industrial Strategy (BEIS) Committee in a report published today.
The Small businesses and productivity report says that for a small and medium-sized enterprise (SME) to succeed it is crucial they are paid fairly and on time. However, the report finds that bad payment practices have led to the failure of many SMEs and prevented others from growing and improving their productivity. Initiatives to address poor payment practices, including the Government’s Prompt Payment Code, have been ineffective, say MPs.
The report recommends the Government introduce a statutory requirement for companies to pay within 30 days, move as soon as possible to require all medium and large companies to sign the Prompt Payment Code, and equip the Small Business Commissioner with powers to fine those companies who pay late.
The Committee found evidence that payment terms are getting longer and that several high street stores, such as WH Smiths, Holland and Barrett, and Boots UK have long payment terms. Several companies looked at by the Committee took on average more than 60 days to pay an invoice. SMEs also face other unfavourable terms – described as “supply chain bullying” by the Federation of Small Businesses – such as being required to give discounts for prompt payment or being charged fees to remain on a suppliers list.
Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee said “Small and medium-sized businesses are vital to the health of our economy, providing jobs and prosperity to communities up and down the country. But many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability. Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.
“UK productivity is falling behind its competitors and it’s important the Government’s Industrial Strategy supports the ‘long tail’ of less productive SMEs to benefit from new technologies and skills. Small and medium-sized businesses have an important role to play in rebalancing the UK economy and spread prosperity more widely and to all parts of the country. The Government must play its part and, at the very least, ensure that more SMEs are awarded government contracts, which are paid fairly and on time.”
The report examines the ‘long tail’ of unproductive small businesses, looking at a variety of issues relating to SMEs including support and advice, leadership, management and digital skills, and scale-ups.
Access to public sector procurement can bring important benefits to SMEs but the Government is on course to miss its target of awarding 33 per cent of all central government contracts to SMEs by 2022. The Committee calls on the Government to urgently set out how it will meet its target and, to protect SMEs from late payments, recommends that companies and their supply chains that bid for public sector contracts should pay within 30 days or be prevented from bidding.
The report notes that there are a “myriad of policies and initiatives” aimed at helping SMEs innovate, export and address productivity issues, some of which rely on EU funding. The report recognises that SMEs find this landscape difficult to navigate and fear that that funding will dry up when the UK leaves the EU. The Committee calls on the Government to improve online support for SMEs and urgently explain how it will match EU funding.
The Committee’s report identifies the construction industry as a sector where poor payment practices are rife, as highlighted by Carillion’s woeful treatment of its suppliers. The Committee calls for the Government to extend the Small Business Commissioner’s remit to cover the construction industry.
The report also recommends changes to tackle the abuse of retention payments within the construction industry, proposing that independently managed project accounts are introduced, and money withheld only when there is a good reason to do so.
FSB National Chairman Mike Cherry said “The UK’s economic success and productivity rests on the success of small and micro businesses. This report sets out a clear challenge to Government. Critically the committee is right to have identified that the issue of the UK’s poor payment culture is crippling for many small firms.”
“FSB has long highlighted that some larger companies exploit the imbalance of power with small suppliers to impose unacceptable terms, exceedingly long payment periods and late payments. This sort of behaviour is unacceptable and this cross-party group of MPs has rightly challenged the Government. Eliminating the scourge of late payments would see 50,000 businesses saved each year, add £2.5bn to GDP, which would be a real boost to UK productivity.
“Government must respond to this report with tough action on late payments, supporting smaller businesses to further develop their leadership and management capability and to improve the adoption of basic digital technologies that small businesses need to grow and become more productive.”
Tim Vine, Head of European Trade Credit at Dun & Bradstreet said “Although there has been more discussion on tackling late payments and progress such as the government’s promise to pay its own suppliers in a timely way, this remains a huge problem for small businesses. Our recent report found the average amount owed to UK SMEs rose by almost a quarter from £64,000 in 2017 to £80,000 in 2018, causing cash flow problems and stifling future growth.
“Simply put, late payments put pressure on cashflow and the financial stability of small businesses – 48% of SMEs admit that overdue payments put their business at risk of failure. Although businesses can look at the previous payment behaviour of their customers to help with mitigation plans, SMEs often don’t have the luxury of turning down contracts and it’s virtually impossible to avoid the cashflow impact and risks associated with overdue payments. The introduction of a 30-day payment deadline and financial penalties could be what is needed to deal with this critical issue head on.”