Late Payments (SMEs)

Philip Hollobone Excerpts

Wednesday 14th September 2011 Westminster Hall

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

It is a pleasure to serve under your chairmanship again, Mr Hood. I am grateful to have secured this debate to discuss the effect of late payments on small and medium-sized enterprises.

In the background to how I became involved in the issue and, in particular, launched the “Be Fair, Pay On Time” campaign is a constituent who came to one of my surgeries shortly after I was elected. He was a haulier and had been in business for a number of years. He said that his business was threatened by late payments, in particular from large companies. Although his contractual terms involved payment in 30 days, those companies often took 90 days to pay him.

I decided to see how wide the problem was in my constituency, and I was contacted by a range of SMEs. There was, obviously, an issue, but unfortunately most of them were unprepared to come forward to state their experience, because of fear of reprisals, in particular of being blacklisted for future work. So today it is with mixed feelings that I will discuss my constituents, Ann and Harry Long, and their experience. Ann is in the audience today, with her daughter Janine. They have travelled down from Oldham East and Saddleworth, so I am grateful to them for being present. They are interested to hear about the issue from all MPs and, in particular, about what the Government will do.

In July this year, the plumbing and heating company that Ann and her husband Harry had built up from scratch 35 years ago went bust due to the effect of late payments by larger contractors. Ann told me how larger companies have the buying power to stretch out the time that it takes them to pay their bills to smaller companies such as hers and Harry’s. She said that for most of their 35 years in the business many good local companies such as theirs held strong, honest values about paying suppliers on time. Ann believes that that was because their client base was companies such as theirs—local SMEs who care. When the recession hit, though, the only companies that seemed to have work were the larger ones, so Ann and Harry had to win work with them, even going so far as to compete on eBay for tenders. Last year, however, as a result of bad debts of more than £150,000 from companies not paying promptly or at all—the worst that they had known for 35 years—Harry and Ann’s company went into voluntary administration. With no cash flow, it was impossible for them to continue.

Ann and Harry’s story is not unique. I know about several other businesses which, went into voluntary administration in the summer, primarily as a result of late payments. Nationally, we know from the Bankers Automated Clearing System, which runs electronic processing for financial transactions, that £24 billion is owed to SMEs and that more than a third of SMEs say that large companies are not paying their bills on time. To put that into context, high street banks lend SMEs approximately £47 billion, so the late sum is not insignificant and is affecting the cash flow of those companies.

According to data from a recent survey by the Federation of Small Businesses, over the past 12 months 73% of businesses have been paid late, the average SME being owed £27,000 at any one time, with 56% of FSB members having written off invoices of up to £10,000 because of non-payment and 6% in the construction sector having written off more than £35,000. That position is getting worse. The Economy Watch panel of the Forum of Private Business said last November that late payment had shown a “continued decline”. Small businesses have reported that, typically, payment is now taking 50 to 60 days, not 30, with more than a third of a company’s turnover being tied up in late payment.

The FSB’s survey indicates that manufacturing is the worst industry sector for making late payments, followed by the construction industry. Although the private sector is the worst culprit for late payments, according to 77% of FSB members a significant section of the public sector still fails to pay promptly as well, including local authorities and Departments. New businesses, being particularly fragile as they start up, are also more likely to be affected.

[Mr Philip Hollobone (Kettering) (Con)]

I congratulate the hon. Lady on her excellent speech and on all the energy and industry that she has shown in the House since being returned at the by-election.

A small company in my constituency of Kettering is owed £34,000 by Her Majesty’s Revenue and Customs under the construction industry scheme, and yet at the same time it is being pursued by HMRC for a £10,000 corporation tax bill. May I use the hon. Lady’s debate to pass on a message to the Government that they need to get the Inland Revenue in order, to be on the side of small businesses and not against them?

[Debbie Abrahams]

I agree that the action needs to be comprehensive, and I will mention that at the end of my speech.

The impact of late payment can be disastrous, as we have heard. During the recent recession, an estimated 4,000 businesses failed as a direct result of late payments. Small businesses do not have the cash-flow buffers of larger companies so, in turn, they often pay their suppliers later than they would like, and a downward spiral develops.

The BIS Barometer survey for 2010, from the Department for Business, Innovation and Skills, showed that 60% of businesses have noticeable cash-flow issues and that for 25% of them that is a big problem. The knock-on effects of late payments include the inability of SMEs to access capital from banks and other financial institutions. In the FSB survey, 18% of businesses cited poor cash flow as the reason for a loan application being unsuccessful.