Payment terms that don’t pay

SIR PHILIP GREEN, the government’s efficiency tsar, shocked the small business world earlier this week when he said that the government pays its suppliers too quickly. This outraged many small businesses that have been campaigning against the poor payment terms offered by big retailers in the private sector.

Green argued that terms offered by the government should be extended to the 30 days used in the private sector.

Alistair Tebbit of the Institute of Directors hit back saying that: “It would be highly damaging to small suppliers for the government to take up big company practices of paying bills late… One of the only significant improvements made to the SME environment by the previous Labour government was to move government payment to business to 10-day terms. Unfortunately some larger companies have failed to deliver similarly responsible payment terms.”

Indeed, campaign groups such as the Federation of Small Businesses (FSB) have been calling on Companies House to name and shame the worst offenders over long payment terms. Prue Watson of the FSB says: “Maintaining cash-flow is vital for the success of small businesses, especially when obtaining credit in the current climate is more difficult.”

Small business owner Jim Shaikh whose company Yoomi makes self-heating baby bottles accuses big retailers of effectively squeezing small businesses for credit: “Payment terms of 40 to 120 days can leave me out of pocket for six months. My company has quite low volumes so we have to pay for the plastics and other materials we use to make the products up front.” Worst of all, Shaikh says, retailers often build in a clause that gives them a five per cent discount if they pay early: “Sure enough, they pay the day before the deadline and take the discount. So you wait 69 days of a 70-day payment term and they take the full discount.”

“This has been made more difficult since the crunch because banks aren’t as forthcoming with favourable interest rates on overdrafts anymore. My business is thriving but I can’t operate effectively without maintaining my cash-flow.”