When a small company wins a deal with a giant customer, it should be cause for celebration, not a cash flow crisis. Thanks to large firms’ insistence on using their bargaining power to improve their cash situation at the expense of suppliers, however, too often, the grim commercial reality comes down to this: you want to work the big boys, they want to sit on your cash.
A small supermarket supplier, for example, might pay for its stock upfront, make a “marketing contribution” – effectively paying to rent shelf space – and then wait as long as five months to have the bill settled, reports the Telegraph.
It can of course choose to use invoice finance to release funds from its hard-won relationship, but by the time it has done that, what little margin it had eked out in the first place might have been entirely eroded. Forget about growing the business, even survival can be an achievement when your customers take almost half a year to cough up.
According to the payment processing firm Bacs, small and medium-sized firms are owed £35bn in unpaid bills. Compare that to the £56bn lent to small companies last year and the scale of the issue is clear.
The problem is as important to companies’ growth prospects as the well-worn debate over access to finance, and, unfortunately, arguably more intractable. Well-meant efforts to legislate haven’t worked and aren’t likely to — the Government has admitted as much. Late payment is an inappropriate term here.
It suggests miserly large customers hoarding cash beyond the agreement they made with their supplier. That happens, but slow payment is equally problematic: it is common to hear of payment terms of 120 days or more that the small business feels compelled to agree to if it wants the business.
Few entrepreneurs want to risk their relationship by complaining about the exploitative terms they accept to keep it, although in December, The Sunday Telegraph highlighted a few individual cases in point: FTSE 100 listed Reckitt Benckiser using 120-day terms, IT firm Dell paying 18 days late on 90-day terms and the private health giant Bupa paying after 130 days, (although the latter pointed out that its standard terms are 45 days from the end of the month).
This week, groups including the Federation of Small Businesses, the Forum of Private Business and the Institute of Credit Management, alongside Labour MP Debbie Abrahams, have written to the 75 FTSE 100 members that haven’t signed up to the Prompt Payment Code, a voluntary scheme that promotes good payment practice.