Tuesday, 7 February 2017

Payment Crackdown Intended to Help Small Business

What happens when a small wholesaler doesn't get paid on time by the grocery chains it supplies? Or how about the small data centre and collocation provider whose enterprise clients don't pay their monthly bills on time? Small businesses suffer disproportionately when their customers subject them to late payments because they don't have the same level of cash flow. Tens of thousands of businesses fail every year as a result, according to government estimates. BUT… that's about to change.

The UK government is finally taking action by way of the Department for Business, Energy & Industrial Strategy (BEIS). Beginning in April (2017), large companies will be required to publish pertinent data on the BEIS website explaining how they deal with their vendors. A big part of the disclosure will be the payments they have made to those vendors for services or products rendered. Affected companies will have to report twice annually.

The Federation of Small Businesses estimates that as many as 50,000 small business failures are directly related to larger corporations not paying them on time. They hope the new reporting requirements will drastically reduce that number. How well it will work is anyone's guess.

A History of Problems

The idea of large companies not paying their smaller suppliers on time is nothing new. There is a history of such patterned behaviour here in the UK. But what prompted the government action was the discovery last year that grocery giant Tesco was holding back up to £326 million from vendors by way of payments and rebates. The Groceries Code Adjudicator determined Tesco officials purposely withheld payments in order to improve their own finances. Not only was Tesco forced to pay up immediately but they were also ordered by the government to change the way they do business.

At this point, it seems almost foolish to say the government action is a long time coming. It shouldn't have been necessary. The same large companies withholding payment from their suppliers would never tolerate their own customers being excessively late with payments. You could rest assured that they would put their legal teams on standby if problems with accounts receivable started threatening cash flow. For them to treat vendors differently because they are small businesses without the same kind of accounting and legal resources is not only morally wrong but damaging too.

A Better Position to Succeed

Your average grocery wholesaler or data centre and collocation provider need every opportunity to compete on a level playing field. Forcing larger companies to prove that they are paying their vendors on time is a step in the right direction. It puts the smaller companies in a better position to succeed without constantly having to worry about issues with cash flow.

It will be fascinating to watch how this plays out moving forward. If the Federation of Small Businesses is correct in their assessment and 50,000 companies could be saved every year, the new rules will certainly have an impact on the business landscape. Let's hope the Federation turns out to be correct.

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