Poor payment practices damaging small businesses ability to grow

05 December 2018

The Government should introduce a tougher regime to tackle larger companies who treat small businesses ‘disgracefully’ by enforcing long payment terms or paying their suppliers late, says the Business, Energy and Industrial Strategy Committee.

Bad payment practices have led to failure of many SMEs

The Small businesses and productivity report says that for a small and medium-sized enterprise (SME) to succeed it is crucial they are paid fairly and on time.  However, the report finds that bad payment practices have led to the failure of many SMEs and prevented others from growing and improving their productivity. Initiatives to address poor payment practices, including the Government’s Prompt Payment Code, have been ineffective, say MPs.

The report recommends the Government introduce a statutory requirement for companies to pay within 30 days, move as soon as possible to require all medium and large companies to sign the Prompt Payment Code, and equip the Small Business Commissioner with powers to fine those companies who pay late. 

High street stores and long payment terms

The Committee found evidence that payment terms are getting longer and that several high street stores, such as WH Smiths, Holland and Barrett, and Boots UK have long payment terms. Several companies looked at by the Committee took on average more than 60 days to pay an invoice. SMEs also face other unfavourable terms – described as “supply chain bullying” by the Federation of Small Businesses – such as being required to give discounts for prompt payment or being charged fees to remain on a suppliers list.

Chair's comment

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee said:

"Small and medium-sized businesses are vital to the health of our economy, providing jobs and prosperity to communities up and down the country. But many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability. Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices then we choke-off the opportunity for SMEs to invest and grow in the future.

"UK productivity is falling behind its competitors and it’s important the Government’s Industrial Strategy supports the 'long tail' of less productive SMEs to benefit from new technologies and skills. Small and medium-sized businesses have an important role to play in rebalancing the UK economy and spread prosperity more widely and to all parts of the country. The Government must play its part and, at the very least, ensure that more SMEs are awarded government contracts, which are paid fairly and on time."

'Long tail' of unproductive small businesses

The report examines the ‘long tail’ of unproductive small businesses, looking at a variety of issues relating to SMEs including support and advice, leadership, management and digital skills, and scale-ups.

Public sector procurement

Access to public sector procurement can bring important benefits to SMEs but the Government is on course to miss its target of awarding 33 per cent of all central government contracts to SMEs by 2022[1]. The Committee calls on the Government to urgently set out how it will meet its target and, to protect SMEs from late payments, recommends that companies and their supply chains that bid for public sector contracts should pay within 30 days or be prevented from bidding.

EU funding

The report notes that there are a “myriad of policies and initiatives” aimed at helping SMEs innovate, export and address productivity issues, some of which rely on EU funding. The report recognises that SMEs find this landscape difficult to navigate and fear that that funding will dry up when the UK leaves the EU. The Committee calls on the Government to improve online support for SMEs and urgently explain how it will match EU funding.

Construction industry

The Committee’s report identifies the construction industry as a sector where poor payment practices are rife, as highlighted by Carillion's woeful treatment of its suppliers. The Committee calls for the Government to extend the Small Business Commissioner’s remit to cover the construction industry.

The report also recommends changes to tackle the abuse of retention payments within the construction industry, proposing that independently managed project accounts are introduced, and money withheld only when there is a good reason to do so.

Further information

Image: iStockphoto

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