Many small to medium-sized enterprises (SMEs) across the UK are effectively being forced to loan money to large firms interest-free, according to the Federation of Small Businesses.
In one of a pair of landmark reports issued since the beginning of the year, the FSB warns that late payments and unreasonable renegotiation of payment terms is taking money out of the hands of SMEs, and allowing it to languish for longer in the accounts of the nation's largest corporations.
At a time when bank finance is hard to come by, this is effectively transforming SMEs into an army of interest-free lenders, with repercussions felt throughout the supply chain.
Who is paying late?
The FSB found that 51% of its members were paid late by at least one large organisation in the past 12 months, while many other big brands demand payment terms of up to 120 days, making SME suppliers wait four months for even a 'prompt' payment.
This echoes concerns raised by Lord Digby Jones in November, when he told the BBC that:
"the company at the top is basically borrowing off the small business rather than borrowing off the bank".
John Allan, national chairman of the FSB, makes the same observation:
"Small businesses simply can't be expected to lend interest-free to their large customers, which is in effect what extended payment terms and late payments results in."
How much do they owe?
In the second of the major reports to be published in early 2014 so far, the Confederation of British Industry puts a price on late payment in the UK.
According to the CBI, the average business is now owed £31,000, and the total overdue bill is more than £30 billion.
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Matthew Fell, CBI director for competitive markets, says:
"Most companies agree and stick to fair payment terms, but we need to create a culture of prompt payment in all businesses."
What problems does this cause?
Returning to the FSB report, it is clear that delayed payments - whether due to being overdue, or due to unfairly lengthened payment terms - are causing problems not just for SMEs, but throughout supply chains.
More than a third (34%) have seen their profitability hit by late payments, and 29% have been unable to grow their business as much as if they had had the funds available.
Significantly, almost a third (32%) have had to pay their own suppliers late, amplifying the effect along the supply chain - for example, if £1,000 is owed by a large company to an SME supplier, and that SME in turn cannot pay a £1,000 bill to a supplier of their own, the total debt in the system is £2,000.
Because of this, any move towards prompter payments by a big brand could have a disproportionately positive ripple effect for the economy as a whole - just as any move away from prompt payment can be disproportionately negative.
The ball is in the court of the big businesses, however; and with SMEs unlikely to name and shame the large corporations, for fear of losing their business, it seems only a commitment to ethical practices at board level, or a further tightening of UK payment legislation, will change the fortunes of British supply chains in general.
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