In Focus Commercial Credit


Taking a responsible approach to payment


Public-sector contracts should include clauses to ensure larger businesses pay their suppliers more quickly


The effects of not working responsibly can often be seen during the procurement process. Suppliers can end up being locked into contracts, having bid in good faith and thinking there is money to be made before being proven wrong, as happened with the Virgin Trains East Coast Mainline rail contract. All too often the need to win business sees


companies put in a low sales price, only to find that they cannot deliver on their promises. This can lead to higher costs in the long run and offering less value than (often smaller) suppliers whose initial bids provided real value. Some larger businesses try and incorporate this principle into their procurement procedure. This can build a level of mistrust between organisations, with one side trying to manage costs down and the other trying to manage them up, not to mention the impact on smaller firms missing out on contracts when not having the ability to undercut. Attendees at our recent roundtable


discussed how businesses need to avoid a ‘race to the bottom’ in procurement. During procurement processes it seems as though chasing the absolute lowest cost is the bottom line. The idea of incorporating value, whether that is socially, environmentally, or in another way, is very rarely brought into the equation – and this needs to change. An ultimate goal could be for procurement processes to go from preferring the lowest priced bid to preferring the bid that gives the most value – but mindsets would need to change in order for this to work. One attendee commented on how there


are more attempts in the public sector to try to create more social value and try to make sure it is included as a requirement in contracts. However, this varies between government bodies and local authorities and is not consistent; each procurement department is its own animal, and all do their own thing. It is a positive, however,


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that there is growing acknowledgement that social value needs to be included. When there has been legislation to do


with social value and procurement, there have always been councils and departments that have embraced it; those who are doing procurement in a good, responsible way should be held up as exemplars.


Payment terms Payment terms from businesses to their suppliers are typically 120 days. Even with these terms, however, some organisations may still also want to dispute a fee in full or in part, during or after that period, which can make the time to get paid increase further. Some businesses ask suppliers to give them


discounts in exchange for paying them earlier, which amounts to an abuse of power. Should smaller businesses be accepting such terms? A lot of small businesses live hand to


mouth with their finances and might not be in a position to turn down work or offers like this. However, others may not accept those kinds of terms, so potentially companies who do try to make suppliers accept those contracts may not be getting the best quality as they cut out potential solutions. Another problem highlighted at our recent


roundtable is that power larger businesses may hold in various sectors can extend to them saying: “Accept these terms, or you will never get work in this industry again.” In this bullying scenario (which occurred with Carillion), smaller firms are at a loss as to where to turn to seek advice. Occasionally they will go to organisations


like the Federation of Small Businesses, but will be reluctant to go on the record because they still have to be involved with the offending business as a more major player in their industry. One of the measures which has been


brought in to tackle the problem of late payments is the Prompt Payment Code,


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Small businesses also have to be efficient in their own processes to help ensure they get paid on time, otherwise the administrative burden of invoicing a client could mean that a 120-day payment term does not start for several days


that commits signatories to paying suppliers within a maximum of 60 days. However, the Prompt Payment Code is


voluntary, with no real policing of it, and there is little appetite for kicking people out or punishing them even if they do fail to meet its targets. It has to balance wanting to be seen to be effective, but also not wanting to immediately expel every signatory who fails to meet their obligations. That is not to say organisations always


deliberately miss payment targets. They may have inefficient processes for signing off or raising invoices, for example. Small businesses also have to be efficient in their own processes to help ensure they get paid on time, otherwise the administrative burden of invoicing a client could mean that a 120- day payment term does not start for several days anyway – and that is not the fault of the payer. The government has announced potential


new measures to help end late payments to small businesses. Whether these measures will work will depend on whether they get buy-in, and whether they are enforced appropriately. Even if regulation is introduced, hearts and minds still need to be changed. We


December 2018


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