The scale of late payment in Britain is a sad reflection of the chronic imbalance in business relationships. The hunt is now on for a small business commissioner to address the fact that, as the advert acknowledges, late payment “hampers investment, holds back growth and, in the worst cases, can bankrupt businesses entirely”. The successful candidate is likely to be based in Birmingham.
A staggering £26bn is owed by larger businesses to small firms in the private sector. Late payments cause 50,000 businesses to go bust every year, at an annual cost to the economy of roughly £2.5bn, according to the Federation of Small Businesses. Of the 47% of small firms hit by late payment, the average wait is 72 days for their larger clients to settle invoices.
One of the reasons that larger firms get away with paying late is that their smaller suppliers are reluctant to really push for prompt payment for fear of losing future contracts. Many smaller firms have told me that if they chase payment too hard, they are told they will lose the account. For smaller firms, the loss of a key client is often the difference between survival and bankruptcy. Government initiatives such as the prompt payment code can have little effect when, of the 1800+ signatories, only around 300 are large businesses. The duty to report on payment practices (pdf) was also intended to be introduced in April 2016, but will not be implemented until this April.
So, what is the government proposing? The commissioner will publish advice or information, and direct small businesses to existing dispute resolution services. It will be able to name businesses responsible for chronic unfair payment practices but, ultimately, the bulk of the role will involve signposting small firms to existing ways they can challenge clients themselves.
Who should the government look for? Ideally the commissioner should be someone with a strong business background, who understands the challenges of running a small business. He or she needs to argue for a fair market and a level playing field for our economy. To do so, the commissioner will need to have the confidence of smaller businesses, which is more likely if his or her background demonstrates a strong understanding of the challenge of the culture of late payment.
I don’t disagree with the setting up of a small business commissioner. But he or she faces a challenge to make a real difference. The government’s proposal for the role does not go far enough, especially when you look at what is happening elsewhere.
In Australia there have been state small business commissioners since 2003. They quickly realised the need to go much further than signposting through the subtle threat of naming and shaming. Commissioners in Australia have the power to insist on binding arbitration, and to mandate the provision of company records for investigations. Failure to comply with commissioners’ decisions means fines for persistent offenders.
Meanwhile, in the US, the federal government under Barack Obama insisted that large businesses paid their smaller suppliers in 10 days as part of its procurement contracts. It also used the small business administration to promote prompt payment through the federal procurement supply chain.
In both the US and Australia, the lesson was learned some time ago: when it comes to large firms not paying their suppliers, gentle encouragement and voluntary codes are nowhere near enough.
Labour believes that giving the UK small business commissioner some real teeth makes sense. But in the role, as it is advertised, there will be no fines for persistent late payers, no obligation to attend alternative dispute resolution and no compulsion to provide company records for an investigation. Moreover, the whole of the public sector – late paying councils, NHS trusts and government departments – will be completely out of scope. According to research from 2016 (pdf), the public sector pays small businesses late 62% of the time.
As shown in Australia and the US, this softly, softly approach doesn’t work. A voluntary system on its own is unlikely to be enough to change the culture of late payment. That’s why I will continue to call for the commissioner to be given the powers that she or he really needs to help smaller businesses, so this doesn’t become a missed opportunity.
Bill Esterson is the Labour MP for Sefton Central and shadow business and enterprise minister. He ran his own business for 15 years before becoming an MP.
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