Friday 11 December 2020 2:21 am

The late payments problem is easier to fix than you think

Guy Corbet is director of Fourteen Forty Communications

Small businesses will be at the heart of economic recovery. They will launch, create jobs, build, grow, and bristle with vitality.

These small businesses deserve all the support they can get at this critical time. It has been argued that they need taxpayer handouts and top-down schemes to get moving again. 

But not necessarily: for a great many, getting the money that is already theirs will be enough.  

Late payments is the most common problem that small firms face. It is not a minor issue: the Federation of Small Businesses points to a £23bn crisis

Delays on payments, particularly big companies taking their time to pay smaller suppliers, stand in the way of growth, and can sometimes force small businesses to collapse altogether. For decades governments have paid lip service to the problem. But it is getting worse.  

Indeed, the Federation of Small Businesses found that, since the March lockdown, 62 per cent of small firms have seen an increase in late payment or had payments frozen.

It is important to remember that late payment is often deliberate. Whereas delays once stemmed from inefficient manual processes, the world has since automated. Payments are now often late because it is company policy to be prudent with cashflow, delaying payment for as long as possible. Remember Carillion, which gave its contractors standard payment terms of a staggering 120 days.

While that’s an extreme example, it is common to consider it “best practice” to pay late or impose terms of 60 or 90 days. Suppliers don’t complain lest they sour relationships. And so the problem persists.

It’s time to recognise that the late payment problem does not happen by accident but is often due to deliberate company policies. Once that is recognised, the solution becomes clear.

First, let’s call it what it is: “unapproved debt”.  The expression “late payment” is a vanilla term for using someone else’s money without their permission. Renaming it “unapproved debt” would make it clear that this is not a by-product of prudential cashflow management. It would present it as unapproved finance, which should be explained or scrutinised by the board and wider stakeholders.

Second, set payment terms at 30 days as standard. Longer terms should still be allowed, providing firms keep track of how many of their contracts operate on 30, 60 and 90 day bands, and are prepared to justify why. 

Which brings us to the third point: it should be a requirement for public limited companies to set out their payment performance in their annual reports. They should be required to explain why they are using “unapproved debt” to finance their firm from payments not paid within 30 days.  

These steps should be introduced now, when we need small businesses to pick the economy up off the floor.  

This is not a request for a handout, or a concession. It is simply asking that small firms be allowed to have, and use, what is already theirs.

Main image credit: Getty

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