31 Mar 2016 03:57pm

Debate: late payments legislation

Ian Graham, partner at Kingston Smith, and Philip King, chief executive at the Chartered Institute of Credit Management, discuss if there should be more comprehensive legislation covering late payments in this month’s debate

YES: Ian Graham

At Kingston Smith, we advise over 5,000 small and medium-sized businesses so we see first hand the terrible effect that slow and late payment of invoices by suppliers has on these companies. The vast majority of SMEs have no access to external finance and rely on timely payment of their invoices to pay both their staff and their own suppliers.

There have been countless examples across a variety of sectors where large businesses exploit the power that they can exert over their smaller suppliers. Occasionally, these practices become so egregious that they make it into the public domain and then, due to public pressure or an impending PR disaster, changes are often rapidly implemented. The price supermarkets pay for milk is an obvious example. In the vast majority of cases, though, companies that are being badly treated have to suffer in silence or run the risk of losing business.

Late payment of invoices, or insistence on payment terms of 90-120 days, often without any reasonable commercial justification, is incredibly damaging for SMEs and, as an aside, is also damaging in the long term for big businesses that benefit greatly from the innovation of smaller firms

SMEs are the lifeblood of the UK economy but they are vulnerable to bullying or exploitation by larger businesses. They do not need preferential treatment, but they do need well-crafted legislation that places a clear responsibility on larger businesses to pay suppliers within a sensible time. That is the only way to create a level playing field.

NO: Philip King

The Chartered Institute of Credit Management (CICM) has around 8,000 members and as such also has first-hand knowledge of credit management and the issue of late payment. It has also worked very closely with government (through the Department for Business, Innovation and Skills, BIS) and other leading business organisations in developing best-practice tools, including the managing cashflow guides for businesses (of which more than half a million have been downloaded by SMEs) and, of course, the Prompt Payment Code.

No-one will deny that late payment is an issue. Nobody would argue that there are not examples of larger customers treating their smaller suppliers badly. And no-one would deny that these businesses respond and react when poor behaviours are exposed in the media. The argument, however, is more around how the issue is best addressed, and specifically whether more government legislation/regulation is required. Successive governments have been too quick to ditch initiatives championed by their predecessors. They have also failed to invest sufficient funds in existing legislation, and specifically in promoting what small businesses can already do to protect their cashflow.

The argument also tends to focus too much on whether payment terms should be 30, 60 or 90 days as an emotional “crook”, and not enough around the more fundamental issue of “certainty” of payment and the critical importance of professional credit management. Cultural change, practical support and enforcing existing legislation will achieve more than “new” legislation that could simply cost more and achieve less.

Ian Graham

Existing legislation suffers from two fundamental flaws. First, it does nothing to protect small businesses from being forced to accept unreasonably long payment terms being imposed at the contract stage; and second, it relies on individual businesses taking legal action, against what are often their largest clients, to enforce their rights when contracts have been ignored. Neither of these flaws can be fixed by better enforcement.

The Prompt Payment Code contains much to be applauded and would be a sensible starting point for legislation, but without the full backing of the law it is toothless and as a result, inadequate. It is commendable that those businesses that are signatories to the code want to treat their suppliers fairly, but adoption of the code is voluntary.

The support that the CICM offers to business to help them improve their cash flow management is both welcome and valuable for many businesses but it is wrong to place the onus on the victims of this behaviour. Some SMEs may fail due to poor cash management but many more are well-run and put under tremendous pressure by this kind of corporate bullying. The system is broken and new legislation is the only realistic solution.

Philip King

I think we can agree that what we need is a change in the underlying and deep-rooted culture

Existing legislation undoubtedly has flaws, and the position of the supplier is no doubt stronger when they are confident that the goods or services being provided are essential to the buyer. In such cases, I could argue, it is the supplier that holds all the aces.

What would my colleague’s “new” legislation look like and how would it work? If it puts the onus on the buying organisation to automatically pay interest, for example, there will also have to be the right not to do so if the invoice hasn’t been correctly submitted or there is a genuine dispute. In such cases, the regulation will presumably be through the legal process and so it will be no better than where we are now.

If organisations want to delay payment, they will find loopholes to prevent them falling foul of the legislation. The good payers will remain good and the bad will remain bad.

What we need – and I think we can agree on this – is a change of the underlying and deep-rooted culture to one where all parties adopt good practice and behave responsibly because they want to and they see a benefit in doing so. Paying late is simply wrong and avoidable.

Ian Graham

Philip is correct that the underlying problem is one of culture. The exploitation of smaller suppliers who have limited scope to fight back dressed up as “better procurement” or “more effective supply chain management” will continue as long as these companies think that it is acceptable to do so. While legislation is not a silver bullet it will have a significant effect. A minority of businesses will seek loopholes, but that’s no reason not to try to improve the lot of small businesses. I recognise the challenges in drafting legislation that is both effective and does not unduly burden businesses that are already complying with best practice, but there are many thousands of businesses that are being put under terrible financial strain by this behaviour.

Ideally, legislation will give some businesses a kick-start with the deep-rooted change that we agree is necessary, but even if that proves to be hopelessly optimistic, it will make it just that little bit harder and therefore less attractive for businesses to duck their responsibilities to suppliers – and that must be a good thing.

Philip King

Clearly, we are on the same page when it comes to the need for a change in culture. Businesses must not think it is acceptable to exploit their suppliers by withholding or delaying payment, or inflicting onerous terms. What we appear to disagree about is the best way of achieving it.

Many people still fail to recognise what the Prompt Payment Code was created to achieve. One of its principal roles was to generate a debate and put the issue of late payment on the board (and government) agenda, and to that extent it has been incredibly successful. To build on this success, should the next step be new legislation or to invest in what we already have? Yes, a new initiative will create a new discussion, but if history tells us anything it is that it will surely ultimately fail once the initial excitement (and headlines) have passed.

There is no one single answer to all this: existing legislation, voluntary codes, peer pressure, measures in the SBEE Act and the Enterprise Bill, and general business behaviour all have to play their part in achieving the culture change that Ian and I both want to see.

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