Last week I gave a speech in the House of Commons about the issue of large businesses making late payments to SMEs and the terrible effects this has on them in terms of cash flow and their ability to survive in the current economic climate.
if you would like more information about my campaign Be Fair – Pay on Time please follow the link on the front page of my website.
Debbie Abrahams (Oldham East and Saddleworth) (Lab): I reiterate my thanks and congratulations to the hon. Member for South Basildon and East Thurrock (Stephen Metcalfe) and his colleagues on securing this debate. I also congratulate his constituent on receiving the British Empire medal, which is fantastic.
I am pleased to speak in this debate and to raise the important issue of late payments to small and medium-sized enterprises, and the role that the prompt payment code has in addressing that. The impact of late payments on the cash flow of SMEs and their ability to survive in this difficult economic climate has not received the attention that it deserves. I am glad that this debate has been secured to raise it.
As has been mentioned, sustained growth in the economy ultimately depends on the contribution of SMEs and we need to do everything in our power to support them. As some Members will know, I have campaigned on this issue for 15 or 18 months. I launched a campaign called “Be Fair, Pay On Time” in response to a constituent who came to one of my surgeries shortly after I was elected in January last year. He was a haulier who said that his company was on the brink of folding because of the late payments that he was having to deal with. In some cases, he was having to extend the contracted time for payments to 90 days—three times the period that had originally been in the contracts. I decided to identify how extensive the issue was. A stream of small businesses came to me just from within my constituency, but none of them wanted to speak about the issue on the record because of the fear of reprisals, including being blacklisted.
That was until two brave constituents, Ann and Harry Long, came to see me and said that they would be happy to raise the profile of the problem. At the time, they were still trading, but shortly after they came to see me and said that they would go public, they had to put their company into receivership. After 35 years of trading as a plumbing and heating company, they were feeling the effects of late payments and their company went bust.
Ann told me that larger companies have the buying power to stretch out the time that it takes to pay their bills to smaller companies such as Harry’s and hers. She said that for most of the time that they had been in business, they had worked with many good local companies that, like them, held strong, honest values about paying suppliers on time. Ann believes that that was because their client base was made up of companies like theirs—local SMEs that cared. However, she said that when the recession hit, the only companies that seemed to have work were the larger businesses, so she and Harry had to try to win work with them. By the end of last summer, they had accrued debts of £150,000 because of late payments or payments that were not made at all. With that cash-flow issue, they could not continue.
Fiona Bruce: I want to put on the record my entry in the Register of Members’ Financial Interests. I have been the part-owner of a small business for some 25 years.
The hon. Lady’s point is pertinent. She talked about the impact of late payment on cash flow and referred to her constituents, who are a husband and wife running a small business. There is an enormous impact on the health and well-being of individuals who run small businesses when they come under this kind of pressure, because many small businesses are run by families. Often, both parties are in the business and no other form of income is coming into the home, so the only thing that stands between them and bankruptcy is that home itself. That is why we ought to be concerned that the small businesses in our communities—there are some 4,000 in my constituency alone—are supported properly in the immense work that they do to keep our economy going.
Debbie Abrahams: The hon. Lady makes a very reasonable point, and that was certainly the case with the Longs—indeed, their daughter was also involved in the business. I secured a Westminster Hall debate on this issue to try to raise its profile, and Ann and her daughter came to that. As I have said, however, the story of Ann and Harry is not unique. My constituency has a high level of micro-businesses—more than 85%—a large percentage of which have gone into administration, primarily as a result of late payments.
The hon. Member for South Basildon and East Thurrock has already mentioned some of the data, but I remind hon. Members that according to data from BACS—the bankers’ automated clearing services—£36.4 billion is owed to small and medium-sized enterprises, affecting more than half of SMEs. That figure has increased over the past 12 months from £24 billion owed, which affected one third of companies. To put that into perspective, high street banks lent £56 billion to small businesses last year—this is not an insignificant problem.
According to BACS data, the average SME is owed £36,000 at any one time, and on average waits 58 days for payment—nearly double the contract terms. Over the past year, 158 million hours were lost by SMEs chasing overdue bills. The most recent survey from the Federation of Small Businesses suggests an even worse picture, with 73% of businesses being paid late over the past 12 months, and one in five claiming that half of all invoices are paid late. Interestingly, 70% of businesses say that the problem has worsened over the past 12 months, and that the private sector is the biggest culprit. I re-emphasise the point raised by my hon. Friend the Member for Chesterfield (Toby Perkins), but we should not be pitting private sector against public sector as this goes across the board. There are issues with both sectors, but we must recognise that according to FSB members, the private sector is the largest culprit.
In November 2010, the economy watch panel from the Forum of Private Business said that late payments had shown a “continued decline”. In addition, small businesses reported that payments are now typically made after 50 or 60 days, rather than 30, meaning that more than a third of a company’s turnover is tied up in late payments. The most recent analysis indicates that 42% of SMEs believe that late payment is an attitudinal issue because it is seen as not important.
The FSB survey indicates that manufacturing is the worst industry sector for making late payments, followed by the construction sector. Although the private sector is the worst culprit, as has been mentioned, there are also issues in the public sector about failing to pay promptly. Again, new businesses are those most likely to be affected.
The impact of late payment can be disastrous: it is estimated that 4,000 businesses folded during the 2008 recession as a result of late payments. Small businesses do not have the cash-flow buffers of larger businesses, which often means that they pay their suppliers later than they would like, and a downward spiral develops.
The 2011 barometer from the Department for Business, Innovation and Skills showed that 42% of employers mentioned cash flow as an obstacle to success in their business. Of those who identified cash flow as an issue, 80% mentioned fluctuating income combined with steady outgoings. The next biggest issue was problems with cash flow due to late payments, and more than half of those sampled in that survey claimed that late payments were a particular problem.
The knock-on effects of late payments include the ability of SMEs to access capital from banks and other financial institutions, and in the FSB’s recent survey, nearly one in five businesses cited poor cash flow as the reason their loan application was unsuccessful. Some 13% of businesses refused additional finance said they had had to lay off staff, and a worrying 40% had ongoing financial concerns.
There is growing evidence that late payments to SMEs are hurting our economic recovery. Data from the Office for National Statistics show that SMEs make up 98% of the total number of organisations in the UK economy, providing 59.1% of all private sector jobs, 45% of all employment, and generating 46% of the UK’s income from the private sector—a massive £1,558 billion. If the growth and survival of SMEs is threatened, it is inconceivable that that will not impact on the country’s economic performance as a whole.
The previous Labour Government responded to the needs of SMEs on late payments by introducing legislation that allowed companies to charge interest and obtain compensation on overdue payments. Following the global financial crisis, we worked alongside business organisations and the Institute of Credit Management to launch the prompt payment code that we are debating today. I will not go into the details, because the hon. Member for South Basildon and East Thurrock has described them, but the code is clear on committing businesses and the supply chain to prompt payments, and on businesses applying it reasonably.
Currently, less than a fifth of large firms and only 25% of FTSE 100 companies are signed up to the PPC. The potential impact is clear. Not only does the PPC commit the signatory to pay on time; it also commits the signatory’s supply chain. If major businesses signed up to the code through their supply chains, the business coverage would be huge, so this summer, I invited the 75 FTSE 100 companies that had not signed up to the PPC to do so. That was part of joint campaign with the Institute of Credit Management, the FSB and the Forum of Private Business, and I am very grateful for their support.
Fourteen further FTSE 100 companies have signed up to the PPC, but disappointingly, six have refused to sign, even after they were given a second bite of the cherry—I sent a reminder believing that they had overlooked my first letter. The key reason that non-signers gave was that they were international companies, but many international companies had signed up, so that does not wash. One company said it did not see why it should sign. A major supermarket not only refused to sign, but in more recent weeks has said that it is increasing its contract terms without negotiation by 150% to 75 days, just because it can.
Wayne David (Caerphilly) (Lab): I am sure the House would like to know the name of the supermarket chain to which my hon. Friend refers.
Debbie Abrahams: It is easy to find out—the company is Sainsbury’s. That has been reported in national press, so I am not telling tales.
Staggeringly, the remaining 55 companies did not bother to reply. It is unacceptable for companies to fail to pay suppliers on time or to jack up the payment terms just because they can and because they have the power to do so. It reflects a selfish, I’m-all-right-Jack attitude. There are direct parallels in such attitudes and behaviours to the culture associated with undeserved bloated bonuses and boardroom pay.
As business leaders, with all the rights and rewards associated with their position, those companies must recognise that they have responsibility, including to our wider society. We are one nation, where rights and responsibilities apply to everyone. The wealthy and powerful are not exempt. They need to lead by example, sign up to the PPC and demonstrate acceptable ethical business practice. The code is corporate social responsibility in action.
Caroline Dinenage (Gosport) (Con): I congratulate the hon. Lady on her incredible work to support small and medium-sized enterprises on prompt payment. I am a small business owner—I have been since I was just 19 years old, which obviously was not very long ago. When companies complain to the big beasts, they are told, “If you don’t like it, go somewhere else. If we don’t like it, we can take our business elsewhere.” They need to have a slightly more sensitive attitude to small businesses.
Debbie Abrahams: I agree absolutely with the hon. Lady. It is an attitudinal issue, and I hope debates such as this and other action will shift attitudes and the culture to acceptable practice.
We can also take action as individuals. As much as I have enjoyed shopping in Sainsbury’s in the past, I will not be doing so in future. I hope others follow suit. It would be absurd if people went to the checkout and said, “I’ll pay my bill in the next 75 days.” I hope others vote with their feet, but I also hope that shareholders—not just Sainsbury’s shareholders, but shareholders of the 61 FTSE companies that have refused to sign the PPC or failed to respond to the invitation to sign—will show their strength of feeling at their next annual general meeting, in the same way they showed their feelings about boardroom pay. The business community as a whole should put pressure on their peers. We can do a lot collectively.
I am very pleased, as I have said, that we are having this debate today, and I recognise the support for it on both sides of the House. I am also grateful to the Minister for the announcement this morning that he has written to FTSE 100 and 250 companies, but why has it taken until now? I mentioned my Adjournment debate in September last year. All the right responses were given to my recommendations, but I then got a letter from the Minister at the time which said that he was sorry, but that we could not bring forward the EU directive on late payments to 2013. Instead, we would wait until we had to do so in 2014. That does not show support for our SMEs.
I am also concerned by the Prime Minister’s announcement last month that he was supporting a “reverse factoring” scheme. This allows big businesses to notify their bank as soon as a supplier’s invoice has been approved. The bank, reassured the bill will be paid, will then extend a full, immediate advance of the bill to the supplier but they will charge interest. That is interest on money that is already owed to them. It is outrageous, and I really do not understand the Prime Minister’s position on it. The scheme would be redundant if businesses just paid their suppliers on time.
Another area in which the Government have not done as much as I would have liked is the public sector, and I agree with the hon. Member for South Basildon and East Thurrock on that point. There are concerns that public sector cuts are contributing to late payments to contractors. The NHS, local authorities and Government agencies have all increased their late payments by between 4% and 9% since 2009. Labour set standards for Departments with the goal of paying at least 80% of undisputed invoices within five days and to include clauses in contracts with suppliers to ensure that subcontractors were paid at least within 30 days. Unfortunately, it appears that this is not now happening, and it is estimated that £3.7 billion worth of invoices were not paid within the five-day target and 10% were not paid in 30 days between May 2010 and May 2011.
As the hon. Gentleman mentioned, effective monitoring and reporting is the key and must be put in place. I hope that one of the recommendations that are taken forward is the requirement for an annual report to the House on progress in this area. I also support his suggestion to examine what we can do to ensure that payment terms in contracts include the supply chain. I hope that the Government will commit to that today.
I want to be clear. This is not about pitting private against public, or large against small. It is about doing what is right and fair. It cannot be right that large companies by virtue of their wealth and power can ignore their contractual obligations and put such financial pressure on small companies to the point where they become insolvent. As the FSB has said, this is not just an economic issue, “it is ethically wrong”. The PPC is an important tool. Like a kitemark, it helps identify those companies which recognise their role and responsibilities in paying their suppliers on time. I hope that after today’s debate, the Government will not only tackle late payments by Departments and sort supply contracts out, but will get squarely behind the need to tackle late payments to SMEs and support the PPC.