Wednesday, 13 November 2013 09:47

Prompt Payment Code fails to stop large firms making slow payments

Slow payments represent a substantial risk to small and medium-sized businesses, who must often meet the cost of materials and labour for a month or more while waiting for customers to settle invoices.

But SMB cash flows were recently given what seemed to be a much-needed shot in the arm, in the form of the Prompt Payment Code - a commitment from big firms to pay their invoices as soon as reasonably possible, rather than withholding important funds from their SMB suppliers.

Now a BBC report claims the Prompt Payment Code has failed, with many of the UK's largest firms still taking an age to pay what they owe.

Former trade minister Lord Digby Jones tells the BBC that he has seen businesses not only fail to pay on time due to poor planning, but specifically plan to take as long as possible, in order to hang on to their own funds.  He said:

"I have sat in on board meetings of big companies who have said, 'We are paying on 60 days [terms], let's see if we can push it out to 90.' I have said, 'If you are going to do it, please don't do it to small businesses.' It is really damaging."

Prompt Payment Code vs. Late Payment Directive

Regular readers might look at that statement and wonder how 60-day or 90-day terms are still acceptable since the introduction of the EU Late Payment Directive, which sets standard terms of 30 days for most invoices.

But the 30-day terms can still be overruled through mutual agreement - and small firms keen to win large contracts may still be tempted to commit to 60-day and even 90-day terms in order to win the business, in the hope of managing their way through the difficult first two to three months before the money starts rolling in.

Perhaps this is why, even with the Code and the Directive both in place, SMBs keen to avoid putting off future customers have yet to name and shame their existing clients for enforcing unfavourable payment terms.

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Lord Jones told the BBC:

"I think the Code certainly has not worked. It was a nice statement of intent. At the end of the day, have you heard of any big business being shamed into changing?"

SMBs paying the price

As usual, small businesses are paying the cost of these slow payments, while the big firms basically get an interest-free short-term loan for up to three months at a time.

Lord Jones says:

"Somewhere, someone is paying an additional cost because the company at the top is basically borrowing off the small business rather than borrowing off the bank."

It is up to SMBs to decide what payment terms they can sustain - but remember, any additional pressure on cash flow reduces your ability to withstand one-off, unexpected shocks too.

As such, if you are offering 90-day terms that take your cash flow right to the edge, you may want to make doubly certain that you have effective credit control arrangements in place, and pursue overdue invoices for debt collection as soon as you can.

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