12/05/2014

By Christian Lanng, CEO, Tradeshift

Winning a major deal with a large organisation can be a landmark moment for a small growing business. Securing and running that first big contract is often one of the top reasons why entrepreneurs set up in the first place. Yet, it can be blessing and a curse. While the deal might have been won due to a compatibility of ideas and a strong desire to work together, the SME has to bend over backwards in adhering to the strict payment and procurement terms of these enterprises. This, unsurprisingly, can impact profitability, morale and the desire to take on additional larger clients.

One of the key reasons is difficulties in getting paid for the services or goods that have been delivered. Cashflow is the biggest financial challenge SMEs face; they depend on a steady supply of capital to cover payroll, expenses and materials costs. So when enterprises turn the screws by insisting on lengthy payment terms, paying late or, as Selfridges did last year, demanding fees simply to have their invoices settled, it can really bite. In some cases, it leads to capital constraints that shut suppliers down for good, even those with otherwise healthy businesses.

Yet, large companies continue to wield their power by forcing smaller players to play by their rules for big contracts. This is making it incredibly difficult or even prohibitive for SMEs to take on enterprises as customers. Not only is this unfair to the businesses in question, it’s damaging the massive potential SMEs have to transform our economic outlook.

There have been efforts made to address this. The Prompt Payment Code (PPC) was established in December 2008 to help small suppliers recover money owed to them by some of the UK’s largest companies. Around 1,500 firms have signed up to it – a number of them in the FTSE 100. However, statistics show that large businesses are still twice as likely to make late payments as SMEs, regardless of the introduction of the PPC. The PPC is supposed to be further strengthened by the European directive on late payments, which says business to business payments should be made within 60 days and public sector bills should be paid within 30 days. However, the FSB says some signatories to the code have managed to stretch settlement periods to as long as 120 days – far longer than the limit set by the European Directive.

And while the current legal situation allows small businesses to demand interest on and compensation for late payments, there are legitimate concerns that many don’t take action when this arises through fear of damaging the relationship with their enterprise contractor. Would you rock the boat when your enterprise customer makes up a big chunk of your revenues?

Enterprise minister Matt Hancock recognises that new legislation could be passed meaning big companies could face new fines for paying small businesses late. So, while this is a step forward, businesses cannot rely on a potential fix which may be months away.

But to address this point directly, there are much better options. Mandating e-invoicing is one. When businesses are happily embracing many different forms of technology to advance their business, it’s crazy that accounts payable still relies on shuffling paper; it’s barely advanced in the last 50 years. A Parliamentary Inquiry on e-payments last December suggested – quite rightly – that government backing is needed to really ensure e-invoicing takes off in the UK.

We are already seeing large organisations and public sector institutions in the UK embracing open platforms, which don’t just facilitate e-invoicing and slicker payment, but also much more efficient business processes.