If you were to ask most small businesses what the biggest bane of their lives was, the chances are the answer would be late payments.
What’s the problem? Well, small businesses do not have the financial resilience to cope with late payments from larger companies. Steven Glicher accountants work with many SMEs and have seen at first-hand how late payments can have a detrimental effect on the day-to-day running of a business. However, we’re pleased to be able to bring you some good news on the late payment horizon. Business Secretary, Vince Cable, is set to announce plans to tackle the thorny issue soon.
Mr Cable is expected to announce new legislation which should force businesses to publish their payment terms.
The thinking behind the measure is that the requirement to publish payment terms will “shame” businesses into changing their behaviour. As well as compelling businesses to publish payment terms, the Government will also be working closely with the Institute of Credit Management to try and refine the guidelines of the Prompt Payment Code – a voluntary set of conditions which more than 1,500 businesses have already signed up to. However, despite the results of a 2013 parliamentary enquiry which found that SMEs were owed more than £36bn in late payments alone, the government has refused to go as far as some financial experts have demanded, and will not introduce harsher penalties for late payment like on-the-spot fines for those who pay late.
Commenting on the government’s proposals Simon McVicker, director of policy and public affairs at PCG, a group which represents contractors and freelancers, said:
“The reality is that the only way to ensure big companies pay up on time is to take direct legislative action. In order for it to be effective, the Prompt Payment Code must be compulsory for large companies and it must include sanctions for the worst offenders.”
“We also need a system for small businesses to report offenders anonymously, so they are not compelled to jeopardise important client relationships by sticking their heads above the parapet.”
Will the new regulation work? Will it fix the problems and let SMEs conduct business on a more-level playing field?
Well, that remains to be seen. As accountants we are only too well aware that the proof of the pudding will be in the eating. John Allan, national chairman of the Federation of Small Businesses (FSB), believes the crucial test of the effectiveness of the new regulations will be if those signing up to the Prompt Payment Code actually begin paying within the 60-day window:
“Late payment is no longer acceptable and is damaging growth and job creation,” said Mr Allan.
“Whether these measures go far enough without calling for a statutory code will be determined by how big companies respond to today’s announcement and change their culture. Small businesses can no longer be expected to lend interest free to large businesses.”