This week I was invited to be a guest speaker at the credit industry’s annual conference called CCR-interactive organised by Credit Collections & Risk, to talk about “Be Fair – Pay on Time”, my campaign to tackle the scourge of late payments by predominantly large businesses to small businesses.
“Thank you to CCR Interactive for inviting me to speak at your conference today. I’m delighted to be here and to be able to talk about late payments, their impact on small businesses and the campaign I’ve been running on this for the last 4 years.
In spite of the Government’s rhetoric, we have a very fragile recovery. The Government is borrowing £219bn more than they planned in 2010, with debt to GDP at 80+%. If you adjust for population growth, GDP is barely up to its pre-recession peak and is largely based on oil and gas output and consumer debt, with productivity the second worst in the G7.
Our small business sector is the power house of the economy, contributing 47% of the UK’s income in the private sector, over £1,600bn and constituting over 99.9% of all businesses and 60% of private sector jobs. They are critical to boosting aggregate levels of productivity in the UK. For a sustainable recovery and healthy growth, we need to support and nurture our entrepreneurs and small businesses. But one of the issues facing them and which has a direct impact on their productivity is late payments by large companies to their suppliers. 158 million hours a year is spent chasing late payments, at a collective cost of £10.8m a year according to Bacs, compared with 8.2m last year, although the total sum owed seems to have peaked last year and now stands at £31.3bn (down from £41.5bn in 2014), with small businesses owed £26.8bn (down from £32.4bn in 2014, £24bn in 2011).
Despite that, overdue payments are still proving a strain with 80% of all companies which experience late payments saying they are being kept waiting one month or longer beyond their agreed terms before receiving payment, a quarter admit that late payments are forcing them to rely on bank overdrafts (24%) and a similar number say that late payments are forcing them to pay their own suppliers late (26%). The FPB estimates that in 2012 LP were responsible for 124,000 businesses going under.
As you know, LP effects all sectors, although some are slightly worse than others, with the construction industry being particularly notorious, and private sector worse than the public sector. However, the recent National Audit Office report shows that Government departments are also failing to meet their commitment to pay 80% of undisputed invoices within 5 working days. The NAO found that 4 Government departments take longer than 5 days to pay suppliers, favour pay high volume, low value electronic transactions with a few suppliers and couldn’t demonstrate benefits to the rest of the supply chain.
The Bacs research said that ‘When it comes to government initiatives to curb late payments, about a quarter (24%) say they are aware of measures to oblige large and listed companies to publish payment practices. However, some three quarters (76%) don’t feel these measures improve the speed their companies are paid.’
I agree with them and will come back to this point.
These facts and figures are very important but they don’t tell the stories of the impact this poor payment practices are having on these business men and women, on their livelihoods and their employees’ livelihoods too. I started my ‘Be Fair – Pay on Time’ campaign after a constituent came to see me at one of my surgeries shortly after I was elected.
He ran a haulage firm and told me that his business was on the brink of going under and that one of the key issues for him was the length of time companies, predominantly large businesses, were taking to pay him. In spite of contractual terms of 30 days many were taking well over 90 days to pay. I decided to see how wide scale the problem was locally and received a steady stream of contacts from small businesses with a similar story. However no-one wanted to be named for fear of reprisals including being black-listed from future work. It wasn’t until two more of my constituents, Ann & Harry Long came to see me that I was able to raise the profile of this very serious issue of late payments to SMEs.
In July 2011 the plumbing and heating company that Ann and Harry had built up from scratch 35 years ago went bust due to the effect of late payments by larger contractors. Ann told me how larger companies have the buying power to stretch out the time it takes them to pay their bills to smaller companies like Harry’s & hers. She said that for most of the time they’d been in business they’d worked with many good local companies who like them, held strong, honest values about paying suppliers on time. Ann believes this was because their client base were companies like theirs; local SMEs who care. But she said that when the recession hit, the only companies who seemed to have work were the larger companies, so Ann & Harry had to try and win work with them. But in 2012 as a result of bad debts of over £150,000 from companies not paying promptly or at all – the worse they’d ever known – Harry & Ann’s company went into voluntary administration. With cash flow so severely affected it was impossible for them to continue.
But as you know this isn’t confined to one area or business sector. In 2013, I convened and chaired an all-party inquiry to look at the issues associated with late payments and what could be done about them. The evidence we took from small businesses was incredibly powerful and I would like to pay tribute to those who gave evidence at the Inquiry including, small businessmen Steve Sutherland and Steve Paul for telling their stories.
‘In August last year I lost my business of 25 years, after building it from nothing…late payments meant it was starved of cash flow and I had to put the business into administration. It was the worst time of my life….[It was] Due to a big main contractor playing with us and using their power and might to starve me so they didn’t have to pay me. They were in trouble on a job and through their incompetence we were made to suffer. We lost people from the business. Not a pleasant thing to do to tell people they have to lose their jobs when they’ve done nothing wrong. It’s organised crime. They know what they’re doing and they’re playing with us….’
‘Last year we had a problem when we won 4 jobs with a construction firm, very tight prices….
‘The surveyors had started to target at the beginning of a job how much they were going to reduce the amounts they were going to pay subbies. There was spreadsheet document which I challenged [construction co] but they denied it exists. I even challenged the guy that wrote it and he said, “That’s nothing to do with me”. But it was photocopied on his desk. Dortech “Commercial settlement based on reduction sought from Dortech for general delays caused by them being late” – this is when we’d hardly started the job. So we thought this isn’t right, before we’d hardly started the job to reduce your final costs… we believed they’d won those jobs significantly below their costs knowingly wanting to reduce their cost irrespective on the outcome on their subcontractors….’
My inquiry took evidence from business associations, academics, economists and FTSE companies as well as small businesses themselves. Our key finding was that fundamentally late payment reflects the culture in that company and as we know the culture of a company or even of society ultimately reflects its leadership. We took evidence where it was clear LP was a form of corporate bullying, with the large companies exerting their power over their smaller suppliers just because they could. There was also evidence, as I just described, that many large companies are trying to rebuild their balance sheets on the backs of small businesses, and even have business models which relies on delaying payments to their suppliers. For some Tier 1 suppliers they are little more than a funding repository.
I believe LP like this is unethical and needs to be seen as unacceptable as tax evasion.
I published the report from my Inquiry and following on from this I was invited Radio 5 Live for a phone in…. the response to this was the largest they had ever had, on any subject. It was only after this that the Government started to act.
Prior to that they hadn’t wanted to know and even after telling me they were going to bring forward the EU Directive on Late Payments they delayed implementing it until the last possible opportunity.
TACKLING LATE PAYMENT
So what’s been done to address the problem of late payments? The previous Labour government introduced the Late Payment of Commercial Debts Act in 1998, allowing companies to charge interest and obtain compensation on overdue payments, but fear of reprisals including the fear of being ‘blacklisted’ from contracts was cited as a reason that this legislation was not used more.
The Prompt Payment Code was another tool introduced with the Institute of Credit Management committing signatories to pay suppliers on time within the terms agreed ‘without attempting to change the payment terms retrospectively’ and to enable this at every level of the supply chain and to meet their term. However the PPC has had mixed effects. Firstly there was very poor take up by e.g., FTSE companies (only 25% had signed up until I wrote to them all…) but also alarmingly, just before signing the PPC some companies were increasing their payment terms negotiation or notice with their suppliers. Even worse, some companies had the gall to be PPC signatories and to still change payment terms without negotiation or notice!
As I’ve just mentioned, the EU Late Payment Directive came into effect March 2013. This stipulates that public authority to business invoices must be paid in 30 days and business to business invoices must be paid in 60 days with debtors forced to pay interest and an administration fee, the latest legislation to try to address this issue. Across Europe £1.6tn is owed in LP. One of the important aspects of this Directive is that under section 7 it allows business intermediaries to act on behalf of individual businesses to, e.g., mount a challenge to ‘grossly unfair’ payment terms as detailed in the legislation. However after failing to address my request to bring forward this legislation delaying putting it on UK statute until the last possible moment, it now appears there are issues in terms of how it has been transposed into UK law which could prevent business intermediaries supporting small businesses under section 7.
Another development which you’ll be aware of is the growth of Supply Chain Finance or reverse factoring schemes. I have some concerns about these but would be interested in your take on this.
SMALL BUSINESS & ENTERPRISE ACT
The Government finally took some action to address LP in last year’s Small Business & Enterprise Act. And while this is a welcome first step it doesn’t go nearly far enough. Labour’s BIS team made several recommendations some of which have been taken up by Government but have been dramatically watered down.
The clause on updating the Prompt Payment Code fails to describe how this will be updated. Currently this is abused by a number of prominent large companies.
After promising to introduce 30 day payment terms all through the public procurement supply chain as described in ‘Small Business: Great Ambition’
‘We will make sure small firms get treated fairly by mandating prompt payment terms all the way down the public procurement supply chain…’
The Government reneged on this and instead in clause 3 they state that regulations ‘may’ be introduced to require large companies to regularly publish information about their payment practices. The NAO report I mentioned at the beginnings shows how successful that has been.
Another example is their failure to reform the Pre-Qualification procedures for public sector contracts which has been estimated to cost just the construction industry alone over £1bn annually. The amendments I put forward on this reflected the recommendations from my inquiry and proposed including PQQ questions on past payment performance and preventing contractors making changes to payment terms without negotiation or notice. These were also rejected by the Govt.
Other changes to the Bill that I proposed that would have protected small businesses from poor payment practice issues included a new clause to address the issue of retention of monies in the construction industry and an amendment to Article 7 of the EU Directive on LP which protects small businesses and allows them to maintain their anonymity when challenging grossly unfair practices. The Mystery Shopper Scheme in the Act does nothing to address the climate of fear in reporting these events.
Business associations I have spoken to see the Act as a ‘massive disappointment’ as far as LP is concerned.
Fundamentally the Act and the Government has failed to address the fundamental issue that LP is a cultural issue. Once more they are failing to stand up to powerful vested interests on behalf of small businesses and the people they employ.
Labour set out an agenda to tackle LP and with our new BIS team and I will continue the fight on this key issue.”