Almost two-thirds (62%) of UK small firms have been subject to late or frozen payments in the wake of the Covid-19 outbreak, according to the Federation of Small Businesses (FSB).
Based on a study of 4,000 firms, the FSB’s new report Late Again: how the coronavirus pandemic is impacting payment terms for small firms, shows that just one tenth of the nation’s small businesses have agreed changes to payment terms with their clients – meaning that the vast majority of this Covid-era wave of poor practice has not been formally signed-off by creditors or debtors. (FSB, 29 June 2020)
And despite concerted efforts in government circles to improve procurement practices – efforts that were accelerated following the collapse of Carillion – there is no discernible difference in late payment activity between public- and private-sector supply chains.
According to the report, 65% of small firms that supply other businesses have suffered late or frozen payments – and an almost identical proportion (63%) of firms in public-sector supply chains have suffered the same treatment. Broken down by sector, small firms in the wholesale (71%), legal and accounting (62%) and advertising and marketing (62%) fields have been hardest hit.
In light of the figures, the FSB has called on the government to make any big corporation that receives state or Bank of England-backed finance to help it through the current recession sign a special Supplier Charter. That document will commit the relevant corporations to pay their small suppliers within 30 days without fail, while working with the Bank of England to shore-up supply chain finance and ensure it is used to pay small businesses swiftly.
FSB national chairman Mike Cherry said: “Before the Covid-19 outbreak struck, many small firms were already under immense financial pressure because of late payments. With cash flow 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.”
He added: “Our endemic culture of treating small businesses as free credit lines against their will must be brought to an end … If the small firms that make up 99% of our business community are to play the fundamental role we need them to in ending this recession, this behaviour must stop. The government promised to act a year ago. Time is running out – we need to see delivery.” (FSB Media Centre, 29 June 2020)
What message should leaders of large corporates grasp about the effects that late payment can have at this time – both on small suppliers, and corporate reputations?
The Institute of Leadership & Management’s head of research, policy and standards Kate Cooper says: “A couple of months ago, the UK’s interim small business commissioner Philip King wrote a LinkedIn piece where he criticised the lack of morality among large companies that delay payments – particularly to small firms – in order to mitigate their own cash flow problems. It was a potent reminder of the relationship that exists in this territory between power and integrity. So many corporations are the primary customers of small businesses. And they can treat small firms really badly without those suppliers being able to simply walk away. But just because large firms can exert that sort of power doesn’t mean they should.”
She explains: “If one part of the value chain is operating in conditions where it’s not being adequately rewarded, that weakens the chain as a whole. As such, poor payment practices are just not sustainable. A decision to delay payment – which a large firm may regard as a quick win to conserve a modicum of cash – will translate into a disproportionately difficult position for the supplier. And ultimately, you may lose that supplier altogether if it is forced to cease trading through lack of income.”
Cooper notes: “To me, that’s not the essence of values-driven leadership. That’s not the hallmark of a corporate that’s seeking to forge a great reputation within its community. It sends out the signal that treating other firms badly may not be its only issue. So that pursuit of short-termism – driven by a cost-cutting, ‘I’m only in it for myself’-type agenda – goes against absolutely all the major tenets of ethical supply-chain management.”
She adds: “If anything should change after Covid-19, it should be large corporates having a greater recognition of how interconnected our fortunes are. It’s no good looking after just one area of our value chain: if any part of it collapses, we all struggle.”
For further insights on the themes raised in this blog, check out the Institute’s resources on integrity