Late payment culture a ‘barrier’ to economic recovery

Problems with late payments and unilateral changes to payment terms and conditions have been described by a business group as one of the main barriers to a return to economic growth.

The Forum of Private Business (FPB) welcomed an announcement that a number of large companies have pledged themselves to signing the government’s Prompt Payment Code.

But the organisation warned that delays in paying and sudden changes to agreed terms and conditions are having a significantly adverse effect on smaller suppliers.

According to the FPB’s latest Economic Downturn Panel survey, conducted in April, over half (56 per cent) said that problems with late payments had worsened, while 24 per cent cited unpaid invoices and the cash flow difficulties that followed as the key issue affecting their businesses.

Other studies carried out by the FPB revealed that, as of the end of 2008, nearly a third (32 per cent) of smaller firms were owed between £1,000 and £5,000 at any given time, with 88 per cent claiming they were not being paid within contractually agreed periods.

In an effort to combat the problem, the government set up its Prompt Payment Code.

Under the Code, larger businesses agree to pay suppliers on time, within the terms agreed at the outset of the contract, without attempting to change payment terms retrospectively and with no change in either contractual payment terms or the usual payment period during the downturn.

They also commit to providing suppliers with clear and easily accessible guidance on payment procedures; ensuring there is a system for dealing with complaints and disputes; and advising suppliers immediately if there is any reason why an invoice will not be paid to the agreed terms.

At a recent Department of Business seminar, several of the UK’s biggest companies promised to add their names to the Code.

Lord Mandelson, the Business Secretary, said: “The promise by FTSE companies to pay on time is very welcome and will hopefully bring an end to the devastating impact which late payments can have on small business.”

Business Minister, Shriti Vadera added: “Late payment can be the final straw for small business in the current climate. So the commitment here today by major companies heading up supply chains to pay on time is a win for all businesses.”

Phil Orford, the FPB’s chief executive, applauded the announcement but urged more action to help ensure firms do not suffer interruptions to their cash flows.

He said: “The biggest companies must take the lead in pledging to pay promptly, setting in motion similar commitments right along the supply chain. It is pleasing that more have agreed to sign up to the Prompt Payment Code.

“We would urge the remaining FTSE 100 companies and other businesses to sign up without delay in order to create the certainty that smaller businesses need, particularly at the present time.”

Kevin Green, chief executive of the Recruitment and Employment Confederation (REC), added his welcome but argued that the Code must be seen as carrying real weight.

Mr Green said: “It is vital that the end result is not just window dressing, but a credible move to get business to play its part in keeping the economy moving. Feedback from our members has shown that late payment is one of the biggest challenges they face.”