£23bn late payment crisis deepens through lockdown

The UK’s largest business group is calling on policymakers and big corporations to bring a debilitating late payment crisis to an end as the business community looks to emerge from the current recession.

The majority of small businesses (62%) have been subject to late or frozen payments in the wake of the COVID-19 outbreak, according to FSB’s latest study of more than 4,000 firms.

Its new report, ‘Late Again: how the coronavirus pandemic is impacting payment terms for small firms’, shows that only one in ten (10%) small businesses have agreed changes to payment terms with clients, meaning the vast majority of this fresh wave of poor practice has not been formally signed-off by creditors or debtors.

The study shows that – despite concerted efforts by government at all levels to improve procurement practices, efforts that were accelerated following Carillion’s collapse – there is no discernible difference in late payment activity between public and private sector supply chains.

Around two thirds (65%) of small businesses that supply to other businesses have suffered late or frozen payments. An almost identical number (63%) of firms in public sector supply chains have experienced the same treatment. Small firms in the wholesale (71%), legal and accounting (62%) and advertising and marketing sectors (62%) have been hardest hit in this regard.

The latest Pay.UK data show that the sum of late payments due across the country rose 80% to £23.4bn at the end of last year.

Speaking in the Lords on behalf of the Government last week, Baroness Bloomfield stated: “I accept that publishing reform proposals is taking longer than originally hoped… as soon as we can we will address this issue at pace.” The Government originally put forward a raft of late payment reforms in June 2019.

In the study, FSB calls on policymakers to:

– Make any big corporation that receives state or Bank of England-backed finance to help it through the current recession sign a supplier charter committing it to payment of small firms within 30 days without exception, while working with the BoE to shore-up supply chain finance and ensure said finance is used to pay small businesses swiftly.

– Give the Small Business Commissioner additional powers to investigate and fine repeat late payment offenders and make 30 days the standard definition of prompt payment as set out in the Prompt Payment Code.

– Establish a centralised relief pot for small firms within government supply chains that have seen payments frozen and, over the long-term, work to ensure 95 per cent of public sector invoices are paid within 30 days.

– Only hand work to Tier 1 contractors if bidders can demonstrate full compliance with the Prompt Payment Code or, failing that, establish Project Bank Accounts.

– Amend Financial Reporting Council guidance or legislate to force Audit Committees to appoint a dedicated non-executive director with responsibility for reporting on payment practices within annual reports.

FSB National Chairman Mike Cherry said: “Before the COVID-19 outbreak struck, many small firms were already under immense financial pressure because of late payments.

“With cashflow drying up as the lockdown took hold, this situation has worsened. Sadly, some unscrupulous corporations are trying to inoculate themselves from the impacts of COVID-19 by withholding payments, or even freezing them, at the expense of small businesses.

“Cash is still very much king for small firms, and withholding it has pushed many to the brink at a time when they’re at their most vulnerable. Our endemic culture of treating small businesses as free credit lines against their will must be brought to an end.

“Worryingly, this behaviour isn’t just confined to the private sector: late payment is equally prevalent within government supply chains.

“If the small firms that make-up 99% of our business community are to play the fundamental role we need them to in ending this recession, this behaviour must stop. The Government promised to act a year ago. Time is running out – we need to see delivery.”