Thousands of businesses need not have failed had the UK enforced a stronger pay-on-time culture, a report has said.
The UK could have avoided 25,000 business failures if buyers paid as promptly as their counterparts in Europe’s economic powerhouse of Germany, said the Federation of Small Businesses (FSB).
The FSB is calling for the government to put “supply chain respect” at the heart of its corporate agenda, introduce a harsher penalty regime and for the Prompt Payment Code to be made mandatory for FTSE 350 companies.
“Uniquely, the UK now risks having a business culture where it is acceptable not to pay SMEs on time,” said Mike Cherry, FSB chairman.
FSB based its calculations on a European Commission equation that relates delayed payments to business failure rates. Using this formula, the FSB found that in 2014, 50,000 firms failed in the UK because of late payment. If the UK late payment rate was improved to Germany’s level, 25,000 fewer companies would have failed.
The FSB calculated that the combined loss of these companies’ turnovers cost the economy £2.5bn.
In the same report, Time to Act: The economic impact of poor payment practice, FSB surveyed 1,000 small businesses and found the average percentage of payments that were reported as late had gone up to 30%, compared to 28% in 2011.
It said this indicated government policies “have had no discernible effect on tackling problems around the UK’s poor payment culture in the last five years”.
The report found 37% of small businesses experienced cash flow problems because of late payments, 30% have been forced to use their overdrafts and a fifth of firms said late payments had hit their profits.
It said 84% of late payments were delayed over a month and the average value of each late payment was £6,142.
FSB said it wanted to make boards of larger companies explicitly responsible for their firm’s payment culture. It recommended firms should be required to report to their shareholders annually on payment practices and appoint a director specifically to represent suppliers.
“Payment culture is set at board level and supplier interest must be represented at the top of the chain. It’s something that CEOs and board members in big businesses must take responsibility for,” said Cherry.
The business organisation also called for the government to “end the delay” in appointing a small business commissioner, first announced in 2015, and give them powers to tackle “supply chain bullying” where larger companies push unfair terms on their suppliers.
“Based on an imbalance of power between large companies and their small suppliers, this now has a chilling effect right across the economy... Big businesses should respect the supply chain and stop using smaller businesses as a credit line by delaying payments and applying bullying tactics,” said Cherry.
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