Late payment crisis deepens through lockdown, report warns

The majority of small businesses (62%) have been subject to late or frozen payments in the wake of the COVID-19 outbreak, according to FSB’s latest study of more than 4,000 firms.

Its new report, Late Again: how the coronavirus pandemic is impacting payment terms for small firms, shows that only one in ten small businesses have agreed changes to payment terms with clients, meaning the vast majority of this fresh wave of poor practice has not been formally signed-off by creditors or debtors.

The study also revealed that, despite concerted efforts by government at all levels to improve procurement practices, there is no discernible difference in late payment activity between public and private sector supply chains.    

“With cashflow drying up as the lockdown took hold, this situation has worsened. Sadly, some unscrupulous corporations are trying to inoculate themselves from the impacts of COVID-19 by withholding payments, or even freezing them, at the expense of small businesses," said FSB national chairman, Mike Cherry. 

According to FSB, around two thirds (65 per cent) of small businesses that supply to other businesses have suffered late or frozen payments. An almost identical number (63 per cent) of firms in public sector supply chains have experienced the same treatment, while small firms in the wholesale (71 per cent), legal and accounting (62 per cent) and advertising and marketing sectors (62 per cent) have been hardest hit in this regard.

The latest Pay.UK data puts the sum of late payments due across the country at £23.4bn at the end of last year.

“Cash is still very much king for small firms, and withholding it has pushed many to the brink at a time when they’re at their most vulnerable. Our endemic culture of treating small businesses as free credit lines against their will must be brought to an end," warned Mr Cherry. 

“Worryingly, this behaviour isn’t just confined to the private sector: late payment is equally prevalent within government supply chains," he added. 

In the study, FSB calls on policymakers to make any big corporation that receives state or Bank of England-backed finance to sign a supplier charter committing it to payment of small firms within 30 days without exception, while working with the BoE to shore-up supply chain finance and ensure said finance is used to pay small businesses swiftly.  

It is also asking for the Small Business Commissioner to be given additional powers to investigate and fine repeat late payment offenders and make 30 days the standard definition of prompt payment as set out in the Prompt Payment Code.  

Moreover, the FSB wants to see the establishment of a centralised relief pot for small firms within government supply chains that have seen payments frozen, as well as Tier 1 contracts only awarded to bidders that can demonstrate full compliance with the Prompt Payment Code. 

Lastly, the FSB is asking for legislation that forces audit committees to appoint a dedicated non-executive director with responsibility for reporting on payment practices within annual reports.