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If SMEs stand up against late payers, will they lose out on business? Photograph: Alamy
If SMEs stand up against late payers, will they lose out on business? Photograph: Alamy

SMEs face £40bn in unpaid invoices, prompt payment is an ethical issue

This article is more than 9 years old
Late invoice payment by big corporates may make business sense but it displays a lack of ethics. A new bill aims to 'go to war' on the issue

Big business likes to boast that the consumer is king. Small companies would love to join them, only they know that it's cash flow that wears the crown. The UK economy may be picking up, but sadly the pernicious habit of late payment is not.

Small and medium sized enterprises (SMEs) across the UK currently face up to £40bn in unpaid invoices, a recent study by Bacs Payment Schemes reveals. That's an average of £38,186 per firm. If the figure reaches £50,000, one in four SMEs say they may have to shut up shop altogether.

Prompt payment represents a core ethical issue, according to Simon Webley, research director at the London-based Institute of Business Ethics. "It is one of those areas that is hardly covered by law or regulation, but it's becoming more and more serious for SMEs who are bullied when it comes to being paid according to contract", he says.

Prompting payment

UK companies are subject to payment rules set in Europe, which hold that business-to-business invoices must be met within a maximum of 60 days (or 30 days in the case of government contracts). The exception is in cases were both parties "expressly agree otherwise" or if the terms turn out to be "grossly unfair" to the creditor – a piece of legalese yet to be fully clarified by UK lawmakers.

That said, even when a clear contract is in place, suppliers are often reluctant to hassle their clients to pay. Small businesses fear being branded as "annoying" or worry about jeopardising client relations, says Webley. "So the onus is entirely on the larger organisation to at least make clear that it will pay its invoices on time. And hopefully that would be in the contract too", he argues.

A small handful of companies make explicit commitments to that effect. Webley points to the examples of Lloyds Bank, Associated British Foods and Severn Trent, all of which include pledges to pay on time in their codes of ethics. Meanwhile, a total of 1,682 firms have also put their names to the government-backed Prompt Payment Code, a voluntary initiative managed by the Institute of Credit Management that commits companies to pay "within clearly defined terms". Many are themselves small businesses, however, and the promises aren't binding.

Depending on who you ask, the reasons for late payment fall into one of two camps. Those in corporate account departments are quick to point the finger at suppliers. Receiving an invoice late or not at all (due to loss or error) comprises 44% of all excuses given to small businesses awaiting payment, according to a recent survey by credit control specialist Satago. "A lot of company owners, especially SMEs, just don't like doing credit control. They don't take it seriously and they don't prioritise it", says Steven Renwick, Satago's chief executive.

Suppliers need to get their invoicing in order, says Renwick. Ensure payment requests are sent out on time, for the right amount and to the correct person. Check that terms are agreed in advance and to everyone's satisfaction, he adds. And don't be embarrassed to chase. "It's an instinctive feeling that you are annoying people, says Renwick, "but you are actually just demonstrating that you are thorough and professional in your business."

Blacklisting bad payers

Ask one of the thousands of small business owners who have been unsuccessfully requesting payment for months and you'll get a very different story. It comes down to a lack of ethics, not admin or lost invoices.

Delaying payment means large companies have more cash on their books for longer; cash that can be used to build their businesses at the expense of their suppliers. Meanwhile, for companies with large turnovers and big wage bills (think supermarkets and construction firms), non-payment represents a way to ride through the lean times. It might make business sense; but that doesn't make it fair.

In such circumstances, suppliers' hands are largely tied. Legal action is a possibility, but expensive and a sure fire means of losing further orders. Instead, governments need to crack the whip. But it remains unclear exactly how. In January 2013, the Business and Enterprise department announced it was "going to war" on late payers. The result is the proposed Business, Enterprise and Employment Bill, a draft of which was published in June. The law promises to mandate companies to disclose their payment practices, but it falls short of naming and shaming late payers.

Ideally, companies would pay on time because it's the right thing to do. Arguably, it's the economically rational thing to do too; bankrupt suppliers hurt their customers, as well as harming the economy at large. If payers still don't step up, then blacklist the lot. Only when small businesses collectively withdraw their services might their big business brethren start valuing them as they should. And start paying them on time to boot.

The finance hub is funded by EY. All content is editorially independent except for pieces labelled advertisement feature. Find out more here.

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