Tax & admin 4 December 2015

Grossly unfair terms: Change is good but small businesses need more support with late payment

Preparation is key when it comes to invoicing suppliers
Preparation is key when it comes to invoicing suppliers

After the government recently launched a consultation aimed at tackling “grossly unfair” terms in supplier contracts, more needs to be done to help SMEs negotiate a fairer deal at the outset.

This also comes at a time when multinational brewer Carlsberg became the latest big business reported to pay suppliers late. Carlsberg said it will be changing its payment terms to “C93” meaning that customer invoices will not be paid until 93 days after they are raised.

The consultation is part of the government’s wider Enterprise Bill and proposes to give trade bodies greater powers to challenge unreasonable terms on behalf of smaller businesses. However, it is questionable as to how much authority a trade body would actually have to prevent contractors from late payment abuses, and this could just add another layer of complexity to the process. In fact, it may even do more harm than good for the relationship between buyers and suppliers – a relationship that is critical to business success. Rather than setting up a policing system using trade bodies as the go-to resource, small businesses need support with negotiating fairer terms at the outset of any new contract agreement.

While a big contract with a large company represents a significant step for smaller suppliers, in reality SMEs should expect invoices to be paid later than usual. Rather than finding themselves in a detrimental situation relaying on a high-value invoice to be paid to fund weekly wages and cover overheads, business leaders should pre-empt this. For many fledgling startups and small enterprises that are often cash poor, bosses simply cannot wait up-to 93 days for an invoice to be paid. Late payments can cause big problems.

In order to offset the risk posed by bigger companies paying late, smaller firms should aim to maintain a balance between a higher volume of smaller contracts where there are fewer complexities to deal with and a more straightforward invoicing system, and the lucrative larger contracts. This will help to create a sustainable future of their business, and reduce the potential detrimental impact of a large corporation not paying on time.

Whether it’s right or wrong, there is a high probability that larger businesses may pay suppliers late so SMEs need to be prepared to deal with this and manage their cash flow accordingly. Some of the larger businesses that have recently extended their payment terms – Morrisons, Diageo and Debenhams to name a few – have offered “supply chain financing” to assist suppliers with the change. Whilst this is one option, suppliers should assess all of the finances sources available to them, not just those recommended by a larger business.

As part of the Small Business, Enterprise and Employment Act, the introduction of a Small Business Commissioner next year along with a free mediation service for businesses will continue to add pressure to late payers. Yet there are still questions over how much SMEs will actually make use of this service – it doesn’t solve the core problem in giving them the tools to actually manage the impact of late payments.

However, it’s clear that naming and shaming businesses guilty of late payment doesn’t work. SMEs need more support with negotiating a better deal from the outset which will help to prevent the problems before they happen.

We need to create a level playing field for SMEs – the collective is the lifeblood of the UK economy. Until the government realises that many of the problems with late payments are negotiation issues and businesses do not require a policing service, this will only continue to escalate.

John Atkinson is head of commercial business at Hitachi Capital Invoice Finance.

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Supply chain