13 August 2013

Businesses could be fined for late payments

Businesses could face heavy fines if they pay their suppliers late, if a new Government proposal is introduced.

The penalties could be good news for small businesses and start-ups which often rely on prompt payments to keep out of financial difficulties.  Business Secretary Vince Cable says a late payment levy, similar to the one already used in Sweden, is one of the options being looked into by the Business Department to try and reduce the £30.2 billion owed to small businesses.

The Government says it has now become considered normal for large companies in some sectors to pay their suppliers late, creating a culture of unfairness. In April the average small business was owed £31,000 in late payments and SMEs typically have to wait 38 days for each invoice to be paid.

Existing legislation not tough enough

Legislation that has already been introduced to tackle the issue has so far not had the desired impact. Less than half of Britain’s largest listed FTSE 350 companies signed a voluntary commitment to pay suppliers within agreed terms, known as the prompt payment code (PPC).

And while legislation was introduced to allow suppliers to charge interest on late payments, many small businesses have been reluctant to use it for fear of losing customers. Research shows some companies are left waiting up to six months to be paid, which hinders their chances of achieving business growth.

Staff working for the Business Department are now drawing up proposals looking at a number of ideas to get businesses to pay each other within 30 days, including the fine for late payments.

Officials are also looking at other initiatives including schemes particularly aimed at sectors where late payments are a problem, including the construction industry.

Unfair effect on business growth

A Business Department spokesman told the Telegraph: “Vince Cable is concerned about companies struggling because others aren’t settling bills on time. This has an unfair effect on them growing their businesses. He’s looking at what can be done by Government to help.”

It is not yet known how much companies could be fined for late payments or how the system would work.

Philip King, Chair of the Institute of Credit Management, which runs the PPC for the Government, says late payment is still a serious issue for businesses.

He claims many businesses pay late because they are short of cash and have cash flow issues but this only gives them a short-term fix and passes the problem onto the company they owe money to.

He says: “Treating suppliers fairly should be the norm.”