Small Businesses: Late Payments

Debate between Lord Sharma and Andrew Bingham

Wednesday 27th January 2016 Westminster Hall

[Alok Sharma]

As I was saying, one of the biggest drags on small and medium-sized businesses is the scourge of late payments. Timely cash inflow is the lifeblood of a small business. It is the difference between growth and stagnation, between profit and loss and, in some cases, between success and failure. There are some 5.4 million private sector businesses operating in this country, and more than 99% of them are small businesses, with 4.1 million consisting of just one person. The last thing someone in that position needs is the late payment of invoices by customers.

A recent survey by the Federation of Small Businesses concluded that central Government Departments and Government agencies tend to pay reasonably promptly, with more than 70% of invoices being paid early or on time. By contrast, more than 50% of invoices from SMEs to larger businesses are paid late. Research from Bacs Payment Schemes Ltd, published in February 2015, revealed that more than three quarters of UK businesses are being forced to wait at least a month beyond their agreed contract terms before getting paid. The Bacs research also found that SMEs bear the brunt of late payments. At the time, £41.5 billion was owed in late payments across the British economy. Some £9 billion was owed to larger corporates but a staggering £32 billion was owed to small and medium-sized businesses.

The late payment difficulties for SMEs are further compounded by the additional costs that have to be borne by businesses as a result of late payments, which average around £700 a month per SME, including staff costs for chasing late invoices. That equates to a total cost to small businesses across the year of more than £8 billion. The Minister is working incredibly hard on this, and the Government are committed to cutting £10 billion of red tape over the course of this Parliament. Can colleagues imagine what would happen if we also managed to eradicate £8 billion of late payment costs from SMEs? It would provide exactly the sort of boost to jobs, productivity and economic growth that the Government want to encourage.

Smaller companies have told the FSB about the very real costs of late payments: reduced profitability; lateness in paying their own suppliers; difficulties in paying staff; lateness in paying Her Majesty’s Revenue and Customs, and all the negative consequences of that action; and, ultimately, lost contracts. There is also the very real risk of insolvency.

[Andrew Bingham (High Peak) (Con)]

Turnover and sales are the predominant drivers for a small businessman, but does my hon. Friend agree that cash flow is a big problem and that the smaller the business, the bigger the problem it is? Consequently, when large companies withhold payment, a small business often cannot implement any early payment schemes because the large company can just go to somebody else and another small business will take the hit for them.

[Alok Sharma]

The adage that cash is king matters most to the smallest businesses, so my hon. Friend is right that cash flow is vital for a small business, as it is for larger businesses. The sum total of all this is that the very real risk of insolvency sometimes results from late payments. A poll of 1,000 business owners carried out in August 2015 by the electronic invoicing network Tungsten showed that more than 20% of businesses faced with unpaid invoices were having a brush with insolvency, and some of them, sadly, were having more than a brush.

The complaints that have come in to me from the Thames valley area as a result of my work with the FSB are wide-ranging and come from a range of industry sectors. I hear that large companies apply pressure in all sorts of different ways. Pressure is being applied to accept 90 to 180-day payment plans, fees are being charged to remain an approved supplier, and all sorts of complicated processes for submitting invoices have to be followed. Sometimes, payment is simply delayed with no reasonable excuse whatsoever.