Hammering home message to pay up (From The Northern Echo)

Hammering home message to pay up

4:17pm Tuesday 7th December 2010 in North-East Business Features By Owen McAteer

A quarter of Europe’s small businesses were driven to the wall by late payments during the downturn and the problem still continues, as Business Editor Owen McAteer discovered.

MANY small businesses are facing an uncertain future, not because of a lack of work, but because they are struggling to secure the payment for work they have carried out.

In the past 12 months, the problem with late payment has risen to such a degree that research shows that, at any one time, the average owed to small businesses is £32,000.

In addition, it takes an average of 40 days for small businesses to be paid, having a massive impact on their cashflow and threatening the survival of some.

It is not only a problem confined to the North-East either.

During the depths of the downturn across the EU, approximately a quarter of all businesses closed due to late payment, with the loss of 450,000 jobs.

Simon Hanson, North-East policy manager for the Federation of Small Businesses (FSB), said: “Late payment is one of the biggest barriers that small businesses face across the North-East.

“Unfortunately, late payment has become standard business practice for many large firms and more needs to be done to support small businesses.

“Despite having the resources and capacity to cope, some large firms use small businesses to supplement cash flow, which is totally unacceptable.”

Mr Hanson said the FSB wanted the Government to fully enact the Companies Act of 1985, which would make large companies keep to agreed payment times.

He said: “Those large companies that renege on payment times should be named, shamed and fined. However, to achieve this Companies House would need more resources to fulfil its role.”

Mr Hanson said it is not only the private sector that is causing problems for many small businesses.

“Many small businesses are struggling with public sector clients,” he said.

“Despite the Government pushing for all bills to be paid in ten days, there are far too many small businesses that don’t see this.

“The Government must be stronger in enforcing this to help small businesses get paid on time, especially as many don’t have the time to chase payment.

“Our members would rather be getting on ensuring that their business can survive and grow rather than chasing finance departments for payment.

“Small businesses will drive the recovery of the economy across the North-East, but more must be done to tackle late payments and help more survive, prosper and grow.”

With many firms large and small still struggling, Neil Forrest, managing director of Teesside insurance broker Towergate Risk Solutions, which provides credit insurance for small firms, said it was not only late payment that was threatening the future of small businesses.

He said: “Late payments are a serious issue to all small businesses, but at least there are avenues that can be taken to collect payments, such as debt collection and legal action.

“However, the biggest and most permanent risk is the insolvency of a customer.

“Usually under such circumstances, there is next to no chance of recovering a penny from the debtor, with the supplier having to take the full debt on themselves.

“It is not only the actual cost of the debt sustained that impacts the business, but the extra work that is needed just to stand still.

“If a small business has a ten per cent profit margin and sustains a £10,000 bad debt, the business will need to sell a further £100,000 of goods or services just to recoup the loss.”

Ross Smith, head of policy at the North East Chamber of Commerce (NECC), said cashflow is an issue that has repeatedly been cited as a concern by its members.

He said: “Our members raise cashflow as one of their biggest concerns time and time again, and have done for the past few years. In these tough economic times, it is particularly important that businesses maintain some liquidity, and prompt payment is key to this.

“The feedback we are getting from members is that issues with cashflow are not improving.

“Businesses rely on payment being made on time in order to operate effectively, so it is a real concern.”

The NECC has a 30-day pledge on payments, by which it aims to process and clear all invoices within that time.

Mr Smith added: “Through feedback from our members, we understand better than most the issues that late payment causes, so while it is our policy to make payments to suppliers within 30 days, we always attempt to do so much quicker.

“Any invoices received are processed right away, and on average we are paying our suppliers well within the 30-day period.”

So what can affected businesses do about the problem?

Hazel Armstrong, the Durham and Darlington branch chairwoman of the FSB, runs Hazel Armstrong Ltd in Shotley Bridge.

She said the best way to avoid the problem was to have procedures in place agreeing payment terms before carrying out any work.

Mrs Armstrong said: “If I was doing work for someone, I would put an agreement in place which states my payment terms and get it signed.

“If you are dealing with a large corporation with extended terms, say 90 days or longer, you need to either work it into your cashflow or negotiate your terms prior to starting work or supplying goods.”

It is even more of a problem where firms are carrying out work, such as subcontracting, without any written agreement on payment of any type, as the only cause of redress might be legal action.

Finally, Mrs Armstrong believes the most important way of securing payment is to ask for it.

She said: “Some companies are afraid to ask for their money because they are carrying out work for customers they consider friends or want to continue doing business with.

“However, as part of your customer service you keep in touch with them, asking if they are happy with what you have supplied.

“It is when companies don’t ask that they don’t get paid . It is much easier not to pay those who are not asking.”

If all else fails, Mrs Armstrong suggests using a credit control expert to do the asking, before it is too late and the necessity for litigation.