Time to strengthen the Prompt Payment Code

carillion collapse

Paul Christensen, CEO and co-founder of Previse, argues for the strengthening of the Prompt Payment Code and recognition for the best payers following the collapse of Carillion.

The fallout from the Carillion collapse continues, bringing each week fresh revelations about the company’s management practices, financial affairs and the way it treated suppliers. The story is a tragedy for tens of thousands of small businesses which supplied Carillion and, thanks to its excessively long payment terms, were left out of pocket when the firm went into administration.

Fortunately, this very public demonstration of the risks which slow business payments bring does seem to be prompting some response from the Government. The Chancellor promised a crackdown in his spring statement and, more recently, Secretary of State Greg Clark has committed to strengthening the Prompt Payment Code.

This is welcome news. The Code, as it stands, is a step forward with businesses which sign up required to pay at least 95% of invoices within 60 days. This is certainly better than Carillion’s 120 days but waiting up to 60 days for an invoice will still put a significant strain on a small supplier’s cash flow.

While Carillion was a particularly extreme example of a company with lengthy payment terms, the problem its suppliers faced is mirrored right across the country by hundreds of thousands of suppliers to large businesses. We estimate that, in order to cover the cash flow shortfall which these slow payments cause, businesses are taking out £31.5 billion in expensive financing.

Meeting the cost of that financing, with typical APRs of 20+ per cent, means businesses have less money to invest in growth. Having to chase the payment for months uses up valuable resources. The uncertainty of not knowing when a payment will come through also means that businesses have less incentive to take on significant new commitments such as new staff or even bidding for very large contracts, fearing that they may go into liquidation while waiting to be paid for the contract of a lifetime.

With UK economic growth still behind historic norms and productivity lagging behind, cracking the slow payments problem is an open goal. It would unlock huge value for the millions of small and medium sized businesses which generate 60 per cent of UK full time employment, it is undoubtedly morally right that businesses get paid what they are owed in a timely fashion and, actually, it would be a surprisingly straightforward problem to make progress on.

Most large businesses understand that it is in their interest to pay small suppliers quickly. In some more technical sectors, it is a strategic priority as it enables buyers to secure the best suppliers. What they lack is the tools to overcome the significant process hurdles which slow down payments.

Financing solutions such as supply chain finance (a popular and cheap solution for the largest suppliers) are an important first step. However, these solutions are usually unavailable to smaller suppliers due to the high onboarding costs, and they typically only cover the largest 1 per cent of suppliers, leaving out the 99% who are most in need of cash flow. Now, through machine learning, small businesses can access a similar programme of financing which can allow them to receive payment instantly, as soon as the goods or services have been delivered.

Given that these tools now exist, Government can be bolder in what it expects of large businesses. By laying down credible standards for a good payer through the Prompt Payment Code, it would give small businesses the confidence to know what they should be able to expect of their large buyers.

By publically recognising the businesses which uphold the highest payment practices, for example, businesses which look to offer a range of payment options to all suppliers, the best small suppliers would quickly move to supply those companies. It would significantly strengthen the strategic benefits to large businesses of being cash-on-delivery payers and likely accelerate reform in this area.

By voting with their feet, suppliers can help to speed up the process of moving business to business payments to the cash-on-delivery economy which it should be.