Business

Scheme to ensure payments to small companies 'not working'

Pound notes Image copyright PA
Image caption Some contractors are said to be extending payment terms to as much as 120 days

A government-backed scheme to ensure small companies get paid on time is not working, the BBC has found.

The Prompt Payment Code was established in December 2008 to help small suppliers recover the £30.2bn owed to them by some of the UK's largest companies.

Around 1,500 firms have signed up to it - a number of them in the FTSE 100.

But business leader and former trade minister Lord Digby Jones is among those who think the code is a failure.

The Prompt Payment Code was launched to encourage the big businesses to pay their suppliers faster.

Signatories promise to abide by the terms set out in their contract - and not to change them retrospectively.

Suppliers are also guaranteed the right to complain if they are unhappy.

The scheme is supposed to be further strengthened by the European directive on late payments, which says business to business payments should be made within 60 days and public sector bills should be paid within 30 days.

Smaller companies often face cash-flow problems if bills are not paid on time. Typically, they face extra costs - such as extending a bank loan to tide them over.

The construction sector is particularly badly hit by late payment.

Steve Paul, who runs a plastering business in Staffordshire, said: "We are currently working on very tight margins and then not to get paid on time just causes you so much pressure, stress and aggravation and again we have a supply chain - we have to pay our guys who are working on site.

"Some contractors are dragging payment terms to 45, 60 even 120 days. When you've got to pay all that money up front and try and run a business it's nigh on impossible."

Image copyright BBC Sport
Image caption Businessman Steve Paul says late payments make trading "impossible"

At one point they were owed £1.2m, causing cash-flow problems so severe that the company had to cease trading, Mr Paul said.

Lord Jones says he has known large companies to deliberately try to extend their payment terms as a business strategy.

"I have sat in on board meetings of big companies who have said 'we are paying on 60 days, let's see if we can push it out to 90'. I have said: 'If you are going to do it please don't do it to small businesses.' It is really damaging."

The Federation of Small Business (FSB) says some signatories to the code have managed to stretch settlement periods to as long as 120 days - far longer than the limit set by the European Directive.

Mike Cherry of the FSB said: "We know around four in 10 businesses that are paid late will go on to pay their own suppliers late or struggle to pay their staff. It cannot be right that small businesses are in effect being asked to lend to their large customers.

"This can only have a negative impact on growth and investment."

Lord Jones said the Prompt Payment Code was ineffective.

"I think the code certainly has not worked. It was a nice statement of intent. At the end of the day, have you heard of any big business being shamed into changing?"

Lord Jones added that as a result, small companies cannot afford to take people on - or invest in new equipment.

"Somewhere, someone is paying an additional cost because the company at the top is basically borrowing off the small business rather than borrowing off the bank," he said.

However Philip King, of the Institute of Credit Management - which operates the code - insisted it was having a positive effect.

"There is evidence that companies that are signatories pay better than companies that are not," he said. "And there is also research which shows companies that are signatories have improved their performance over the past four years."

The Department for Business Innovation and Skills said: "It is not acceptable for businesses to fail to pay their suppliers on time and we are playing our part to help tackle the problem.

"This is a vital issue for small businesses and more can and will be done by government to help businesses tackle it."

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