Late Payments (SMEs)

Baroness Burt of Solihull Excerpts

Wednesday 14th September 2011 Westminster Hall

[Debbie Abrahams]

I thank my right hon. Friend for making that vital point. Yes, the previous Labour Government did a lot about that, but monitoring and reporting of the five-day target is needed. That is one of my action requests for the Government.

[Lorely Burt (Solihull) (LD)]

I do not wish to prolong the point, or your patience, Mr Hood, but under the Late Payment of Commercial Debts (Interest) Act 1998, which was introduced by the previous Government, small companies may charge interest if the time for payment of a debt is exceeded. The problem is that as soon as a company rattles the chain of a larger company, it risks losing business. There is always a fine balance between the power of big companies and the lesser power of smaller companies.

[Debbie Abrahams]

I totally agree with the hon. Lady. That is one reason why companies are not prepared to come forward. A concerted effort is needed with a range of interventions to address the power imbalance that she has rightly identified.

On the impact on businesses that were refused additional finance, 13% said that they had had to lay off staff, and a worrying 40% said that they were having ongoing financial difficulties. There is growing evidence that late payments to SMEs are hurting our economic recovery. Data from the Office for National Statistics show that SMEs comprise up to 98% of the total number of organisations in the UK economy, providing 59% of all private sector jobs, 45% of all employment, and generating 46% of the UK’s income from the private sector—a massive £1,558 billion. If their growth and survival is being threatened, it is inconceivable that that is not impacting on the country’s economic performance as a whole.

One of the favourite myths that the Government like to spin is that the recession was made in Britain and that the public sector is somehow to blame for our flatlining economy and should be made to pay with cuts in public spending and vital public services. No one is fooled by that, because everyone knows that the recession started on Wall street, that it was the result of private sector debt, led by the banks, and that it affects every major economy in the world. It belittles my constituents to try to portray it is as anything else.

A little reported fact is that in 2009 City of London debt was 245% of gross domestic product, compared with public sector debt of 60%. It is time that this Government stopped blaming the previous Government and the public sector for the country’s economic woes and targeted action where it is needed on those who abuse their wealth and power. I want the Government to take action on those who flout their contractual responsibilities and fail to pay their bills on time, because those people are not above the law or untouchable. As the Federation of Small Businesses has said, this is not just an economic issue, because it is ethically wrong.

With the shadow Minister, I am calling on the Government to back the following action to address late payments. First, they should bring forward the new EU directive on late payment from March 2013. It introduces a minimum fixed amount of compensation for late payment and tightens the time period for payment. Secondly, the Government must ensure that all Departments are better at meeting the five-day payment target and have effective monitoring and reporting procedures in place. Thirdly, the Government must ensure that prompt payment is enforced all the way down the supply chain and not just between contractor and subcontractor.

--- Later in debate ---

[Lorely Burt (Solihull) (LD)]

I congratulate the hon. Member for Oldham East and Saddleworth (Debbie Abrahams) on securing this important debate. I am sorry that at the end she accused the Government of engaging in public sector bashing. This debate is much more important than scoring political points.

The “squeezed middle” is a phrase that we do not often use in relation to companies, but it is exactly what is happening to small businesses in this country. They are being squeezed on one side by their suppliers, and the late payments that the hon. Lady so eloquently described, and by the banks on the other side. They cannot obtain credit, and their tragic situation is worsening, as the hon. Lady said, and as the constituents who are here today illustrate.

Small businesses are much more fragile than larger ones, so having to endure late payment costs jobs and inhibits growth. Big companies with more than 500 employees pay, on average, 35 days late, but small companies with fewer than 100 employees pay, on average, 19 days late. Big companies have a great deal more relative credit than small companies, and big companies get fatter while small companies struggle and get leaner. However, as I said during my intervention, coming down hard on big businesses may be counter-productive, and may deter them from trading with smaller businesses.

The hon. Lady referred to the prompt payment code, which was launched last year by the Institute of Credit Management on behalf of the Department for Business, Innovation and Skills. Companies promised to keep to payment terms agreed at the outset of a contract. However, I understand that fewer than 1,000 companies have signed up. What can the Government do to encourage many more companies to sign up to the prompt payment code?

[Jim Shannon (Strangford) (DUP)]

A system that might benefit both suppliers and receivers is the BACS system—bankers’ automated clearing services. It ensures that money goes from A to B quickly and painlessly. Does the hon. Lady believe that there might be some way of incentivising that scheme so that everyone benefits?

[Lorely Burt]

I am grateful for that intervention. It is an excellent idea, and perhaps the Minister will address it when he responds.

The Companies Act 1985 requires public companies to submit their payment terms, but that has not been properly enforced. The Federation of Small Businesses has suggested that more resources be put into the policing of that requirement. Many companies write warm and woolly words about how socially responsible they are, but if that is not backed up with action and a declaration of their terms so that they can be measured against those terms, their warm words about how corporately responsible they are cannot be measured.

The House is scrutinising the late payment directive. The Government are challenging the EU to reduce the threshold at which payment is made from 30 days to 10 days, and, if that can be achieved, it will be admirable. It is, however, something that we can impose on ourselves in this country today.

The FSB suggests that we should introduce a social clause for sub-contractors. First-tier suppliers are often paid promptly but keep the little guys further down the supply chain waiting. If first-tier suppliers are being paid quickly it should be extended to everyone down the supply chain, and the further down the supply chain a business is the more important prompt payment is to it. I should be interested to hear the Minister’s views on that.

On public sector procurement, there is an aspiration to simplify applications for approved supplier status and make them manageable for small businesses. What progress have the Government made with that? If small businesses can contract directly with Government bodies, their cash flows will be much improved.

I should like to ask about the enterprise finance guarantee, the aim of which is to make £2 billion available to viable small businesses without credit history or collateral. The Minister might not have the figures to hand, but I should be interested to hear how that is going.

The Government have an aspiration to award 25% of their procurement to small businesses. We are making great progress towards achieving that self-imposed target, but will the Minister update Members on it, either this morning or later?