Jason Foo, CEO of BBD Perfect Storm puts the debate to the Houses of Parliament to discuss late payment terms and the impact that has on agencies.
Now before we get into whether late payments should be subject to legislation, let’s just clarify what typically constitutes a small business. According to the Government’s statistics, as of October 2022, there are 5.5 million private sector businesses. Of these, 99.9% are classified as small to medium sized enterprises. So let’s be clear, this is an issue that affects the vast majority of the country.
Now of these 5.5m companies, 3.1m of them are sole traders. That means they are effectively, one-man bands. Even if we look at total employment across the SME sector, it constitutes 16.4 million people. In other words, as an average across the country, the typical company employs less than three people.
These companies are the lifeblood of our economy. They ARE the economy. The are what builds the Great in Great Britain. They are very evidently NOT business Fat Cats. No, they are simply normal, decent, hard-working people trying to provide for themselves and their families. They are, in essence, single-person company employees. Invoices they collect are effectively, and directly, meeting this person’s salary.
Now if you were a salaried employee, at the end of every month you receive your pay cheque. At my company, BBD Perfect Storm, we pay everyone on the 28th of the month. Every month. Without fail. And, of course, our staff rely on that. Every month, we all have bills to pay. From ever-increasing mortgages and energy costs, to food and life’s essentials. And those mortgages and bills are debited on the same day every month. It doesn’t stop, whether you are paid or not.
Now, imagine the impact for our staff, if we decided to pay them in the middle of the next month, 14 days late, or worse, the following month, 30 days late? I’m sure you can imagine, for many, they would struggle to pay their mortgage and everything else.
But this late payment is EXACTLY what happens every day for these small independent traders up and down the country. And worse, it is all too often carried out by large companies that absolutely can and should do better. This issue that is not confined to companies struggling with cashflow. No, it is all too often by major, global companies that are exploiting the weak and vulnerable. Companies that are simply fattening their balance sheets and earning interest on money that should be paid to the little guys.
Some of the worst offenders in this area are companies owned by private equity. Companies that have been ladled with debt by financial engineers and whose cash, which is owed to other (often small) businesses, is used to manage that debt financing.
Why are they doing this? Quite simply, because they can. It’s clearly not right but there is little or no effective legislation in this country to stop them. And this is not just about the personal impact on people trying to pay their mortgages. For those ambitious individuals who want to grow their businesses, which does of course grow the economy and create employment and wealth for our country, it strangles their cashflow and ability to invest.
I am sure you’re familiar with the well-worn expression, “Turnover is vanity, profit is sanity but cashflow is reality.” My question is WHY? Why is so much of running a business, for some many people, simply about the fundamental issue of getting paid on time?
One thing I would like to strenuously emphasise is the difference between ‘late payment’ and ‘long payment terms.’
Late payment is when a company commits to pay on a certain date and then reneges on that.
Long Payment is about subjecting a company to long payment terms, 45 days, 60 days, 90 days, or in some cases even worse. This is a practice that, sadly and unfortunately, is very much the norm if a small company wants to have the privilege of dealing with larger, often FTSE limited companies.
I am sure those opposing this will say: “well, you don’t have to sign up to these terms. It’s entirely your commercial choice and if you accept them, well you can’t have grounds for complaint.”
I say to them and these large companies, “just because you can, doesn’t mean you should.”
Is it a reasonable or decent practice? To me, plainly, it seems like bullying. The big guys squeezing down and imposing their will on the little guys. It doesn’t make for a fair playing field.
Given that all my staff want to be paid every 30 days, that is made increasingly difficult if the company is being paid its invoices every 90 days or worse. You can imagine the squeeze on cashflow and our ability to invest in staff and growth. For all too many companies this becomes an unbearable reality that results in them going out of business. 50,000 companies a year is the estimate from the Federation of Small Businesses.
But let me be clear, this argument is fundamentally is NOT about long payment terms, however unfair and unreasonable they may be.
It is about late payment. It is about making a commitment to pay another business on a certain date and then choosing not to, despite having the means to do so.
Now is it actually possible to legislate on this issue?
Well, the Government certainly seems to be able to impose its will when it comes to collecting its own money. If I am late in paying my personal taxes, then I am fined without question or debate. Admittedly, there is some Government legislation around this. But it’s clearly NOT working.
The Govt has a Prompt Payment Code that it enforces for companies that want to provide services on larger contracts with the Government. But why does it not apply this code more broadly? It needs to be applied to the wider economy.
The government does also legislate for large companies to report on a bi-annual basis their typical payment terms as well as how often they pay their suppliers late. I urge you to look at this BEIS report on payment statistics because it makes for shocking reading and highlights the scale of this issue. Companies being paid on time is the exception rather than the norm in all too many instances. We are talking about big famous ‘apparently reputable’ companies. Household names that are documented as paying their suppliers late 100% of the time.
Now yes, if an invoice is not paid on time than, technically, you are entitled to charge customer interest on the debt. But the reality is that this is simply not practically enforceable for most companies. If I fine the company in interest. Then, yes, I may receive the interest. But it’s very much deemed ‘unbusinesslike’ and in all likelihood, they will then stop doing business with us. And that’s aside from the reams of administration it involves trying to enforce it.
The information is available. But the government needs to apply the fines rather than the small enterprise. If the Government takes on this responsibility than those companies that are consistently paying suppliers late could then be subject to punitive fines that remove the incentive for them keeping the cash to themselves and paying suppliers late.
People start a business for many different reasons. For some it the hope of betterment for themselves and their families. For others, it is the dream of making a difference in their industry or the world. They often put their houses on the line and much more in their efforts to make a go of it. There are many reasons why businesses then don’t succeed. But people not being paid for the hard work they have delivered and risks they have taken should not be one of them.
I ask you is this fair? More importantly, is it right? For business, for the economy, for our country?
I therefore put it to you that Late payments by large companies to small businesses SHOULD be subject to legislation.