By Colin Borland, head of external affairs for the Federation of Small Businesses in ScotlandIt’s not a lack of profitability which kills businesses, it’s a lack of cash. And, with costs going up and business hardly brisk, cashflow worries are never far from many business owners’ minds. But an already tough situation is exacerbated when, having secured the work and carried it out, you need to chase and chase your customer to get paid for it. Late payment is hardly a new problem. It was there long before the current downturn. But the lack of business finance which the credit crunch precipitated made it more tempting for big companies to use their small suppliers as a free overdraft – easing their own cashflow problems while creating a whole lot more elsewhere. It’s only fair to note that in recent years the public sector – or parts of it at least – have smartened up their act and are paying undisputed invoices promptly. But the figures also show that large private sector companies remain the worst offenders. Not only is this practice driving individual businesses over the edge, its effects spread across the economy. We are relying on businesses – particularly small businesses – to lead the UK recovery. But over a quarter of a million of them seen business suffer because they’re wasting their time chasing debts, not out there doing business. Indeed, one in five small businesses now employ a dedicated person to chase late payments. Elsewhere, Federation of Small Businesses (FSB) research suggests a direct link between late payment and job losses. In simple cash terms, the average amount a small business has outstanding is around £30,000 – but nearly 30 per cent of them say being owed £20,000 could put them under. So what’s to be done? Well, there are already laws in place to allow interest to be charged on outstanding sums. But, in the real world, resorting to the legal route is not the most practical option. Given the unequal relationship between the parties, small firms are not likely to incur all the costs and risks associated with taking action against a large, powerful customer. A right you cannot enforce is not really a right at all, so beefing up theoretical remedies available to small businesses probably isn’t the answer. Perhaps, then, we could look at other powers which government or statutory bodies could employ. The Companies Act 1985, for example, obliges public companies to submit their payment terms to Companies House. Public limited companies (PLCs) are required to report their payment policy towards suppliers and the average payment time to suppliers. However, this has not been fully enforced, largely because Companies House lacks the resources to fulfil this role. Thus, it has been argued that, by increasing the resources to Companies House, there is the potential to cut payment times dramatically. We should also be looking beyond our shores to see if this is an international problem – and, if so, how other jurisdictions are tackling it. Do other governments become more involved? If so, how do they avoid that intervention becoming an expensive, administrative nightmare? That we have to consider such solutions is regrettable, but neither businesses nor the economy as a whole can afford the status quo much longer.
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