By Daniel Hunter
For the first time the Federation of Small Businesses (FSB) is assembling an influential cross-party group of MPs to identify possible solutions to the deterioration of payment practises in the UK.
Last month a number of large companies including Premier Foods and 2 Sisters were identified and criticised by the FSB for supply chain bullying.
Recent research by the FSB revealed that almost one in five small businesses had been subject to some form of poor payment tactics. Five per cent had experienced the so called ‘pay to stay’ practice used by Premier Foods, who asked suppliers to pay a flat fee in order to be considered for future contracts.
The cross-party parliamentary roundtable will be co-hosted by the FSB and the All Party Parliamentary Group for Small Business. The event will be held in Parliament on Tuesday 20th January 2015 at 8.30am to 9.30am.
Debbie Abrahams MP, having previously led a cross-party parliamentary inquiry into late payments last year, will host the event. Also at the table will be Anne Marie Morris MP, Chair of the Small Business APPG, Tessa Munt MP, Parliamentary Private Secretary to Business Secretary Rt Hon Vince Cable MP and Mike Cherry, FSB National Policy Chairman.
Mike Cherry, FSB National Policy Chairman, said: “It is simply unacceptable for any company to exploit its market position to enforce unfair and unreasonable payment terms. The money outstanding in late payments is in the billions and has consistently grown larger and larger. We need greater leadership from all parties competing to be in the next Government to toughen up the prompt payment code and improve the UK's payment culture.”
Debbie Abrahams MP, who is hosting the event, said: “Late payment is something that CEOs and board members in big businesses can influence and I have always maintained that a late payment culture in a company is set at board level.
“That makes it a leadership issue and it's time that deliberately paying late, finding ways to pay late, or making unilateral changes to pre-agreed contracts is seen as being as unethical as tax evasion.
“It's simply a case of big businesses using smaller businesses as a credit line by applying bullying tactics that are unfair and have the knock-on effect of stifling growth in the economy.
“As politicians we must work to change business culture and make it unacceptable to pay contractors late as well as shifting the burden of having to take legal action away from the victims of late payment practices once and for all."
As part of the FSB research into poor payment practises, small businesses were asked to give examples of the most common poor payment practices they had to deal with. The FSB has used these examples to create a list of the five most resented payment practices in use today:
1) Flat fees — ‘pay to stay’
Also known as ‘supplier assessment charges’ or ‘supplier investment payments,’ these are flat charges which companies levy on suppliers either as a requirement to be on a supplier list, or packaged as an investment into hypothetical future business opportunities. It is often indicated that non-payment will result in de-listing. New research has indicated that more than a quarter of a million (260,000) businesses could be facing so called ‘pay to stay’ charges after five per cent of businesses surveyed said they had been asked to make a payment by a customer or face de-listing.
2) Excessively long payment terms — ‘pay you later’
In 2011 the EU issued a directive requiring all businesses to pay their suppliers within 60 days, or face interest payments on money owed. However, the UK implementation of the directive allows businesses to agree longer terms “provided it is not unfair to the creditor.” This has led to many companies insisting on payment terms of 90 or even 120 days. In effect this becomes an interest free loan from firms in the supply chain to large companies with excessive payment terms.
3) Exceeding payment agreements — ‘late payment’
As well as insisting on long payment terms, many companies are routinely exceeding agreed terms, or changing terms retrospectively to allow them to miss agreed payment dates. Also thought to be common is the practice of extending payment dates if money is owed on, or close to, the end of a financial reporting date in order to smooth a big company’s balance sheet.
4) Discounts for prompt payment — ‘one for you, one for us’
Prompt payment discounts are arbitrary discounts big firms give themselves for paying early or even just on time. For example, a firm that has agreed to pay 120 days following receipt of an invoice may also apply an automatic discount of 3% if they pay on or before the 120th day.
5) Retrospective discounting — ‘balance sheet bonuses’
Some firms seek to apply retrospective discounts to outstanding money owed to a supplier. This involves the company effectively changing the terms of the contract signed with the supplier after a contract has been agreed. Methods used to extract these vary, but include threats of de-listing, withholding payment, ‘marketing contributions’ and previously un-agreed discounts applied to specific volumes of business.
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