Small businesses being paid quicker, says survey, as Government consults on new measures to improve industry practice

Out-Law News | 19 Dec 2013 | 4:16 pm | 3 min. read

The length of time taken for small businesses to receive payment has improved over the past year, according to an industry survey.

As part of its annual industry 'benchmarking' report, the Association for Consultancy and Engineering (ACE) found that the average time taken for small businesses to receive payment decreased from 90 to 85 days over the past year. However, it noted that public sector clients took an average of 10 days longer to pay small suppliers than private sector clients, despite accounting for 70% of the workload.

The report comes shortly after the Government launched a new consultation exercise on whether more can be done to change the culture of late payment to small suppliers and to encourage those suppliers to make better use of their statutory rights to enforce payment terms or charge interest on late payments. Its call for evidence, published on Small Business Saturday at the beginning of December, closes on 31 January 2014.

"Although these are only proposals at the moment, the exercise demonstrates that the issue of prompt payment has been steadily moving up the political agenda in recent years," said commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com. "Some of the proposals in the discussion paper indicate that the Government is seriously considering making radical changes to payment culture in the UK - however, it remains to be seen whether the outcome of these proposals will result in the desired paradigm shift."

"Businesses that currently impose lengthy payment terms on their suppliers would be minded to keep a close eye on the Government's future proposals, as they could have ramifications on how they manage their entire supply chain. Any fundamental changes could have a severe impact on how customers plan their future purchase orders, invoice processing systems and cash flow. At the same time, SMEs will also want to keep up to date with any new or enhanced rights and remedies that are available to them and know when the payment terms a large customer is proposing are inconsistent with legislation, the Code or that particular customer's corporate responsibility programme," he said.

The Government-backed Prompt Payment Code was set up in 2008 by the Institute of Credit Management as a voluntary agreement promoting good payment practices. Code signatories, including a number of FTSE 100 businesses, are obliged to pay suppliers within an agreed time and to make sure that they have proper processes in place for any issues that may arise. In addition, EU rules on late payment of commercial debts which came into force in March require payment of invoices within 60 days unless the parties agree otherwise and the practice is not "grossly unfair".

Among the issues addressed in the Government's new consultation are whether enhancements could be made to strengthen the Prompt Payment Code and hold signatories to account, and whether more could be done to increase transparency around which companies are prompt payers and which ones are not. In addition, the Government plans to mandate a 30-day maximum payment period for all firms working on public sector contracts and to ensure that all public bodies report on their prompt payment performance publicly online.

"It appears that the Government is looking to shift the importance of prompt payment to the heart of corporate responsibility," said commercial law expert Ben Gardner. "Big businesses should be mindful that they could be required to report on their payment terms and how they treat suppliers more generally. This could impact on how businesses are viewed in the eyes of their suppliers, customers and – more importantly - their investors."

"The Government has accepted the current shortcomings of the Prompt Payment Code, such as it being voluntary and dependent on its signatories acting in good faith. Depending on the extent to which the Government modifies the Code as a result of its consultation it is possible that the reputational risks of failing to comply – and the risk of being publicly removed from it altogether – will incentivise signatories to adopt a prompt payment culture within their organisations," He said.

Gardner noted that the Government was also considering increasing the penalties that could be levied by suppliers in the event of late payment, such as setting a higher statutory interest rate or introducing a minimum 'absolute penalty payment' related to the size of the debt concerned. However, he said that leaving enforcement of remedies in the hands of suppliers was one reason why the existing remedies were not particularly effective.

"The main reason why this remedy remains ineffective is the supplier's unwillingness to jeopardise its commercial relationship with its customers," he said. "It is unlikely that short-term cash incentives it could recover as penalties will outweigh the long-term risk of losing future business."

"It will be interesting to see if any further thought is given to the introduction of fines or sanctions that may be levied by the Government or a trade body - however, this is likely to defeat the objective of late payment penalties, which is to compensate suppliers. In any event, the Government would be minded to issue guidance on what could be deemed 'grossly unfair' payment terms so that customers and suppliers have certainty as to what this actually means in practice," he said.