James Ashton: It's vital we pay up for smaller firms on time

Much attention was given last week to just-about-managing families, but small companies in a similar boat can be forgiven for feeling aggrieved.

The shame on cash-strapped Chancellor Philip Hammond is that the simplest measure to boost the fortunes of the nation’s small firms is also relatively cheap. 

If only large corporations with which they traded settled invoices on time, these companies would be minded to invest, recruit and perhaps even begin to export instead of worrying about keeping the lights on.

A report by the Federation of Small Businesses (FSB)  this month made depressing but familiar reading. A third of payments to small firms are late and 37% of survey respondents said they had run into cashflow problems while they waited for their money to turn up. This subject is never far from the top of the list of worries for entrepreneurs, who don’t have the time or legal muscle to raise an effective challenge.

The last SME growth tracker compiled by Capital Economics, Amazon UK and Enterprise Nation found that while two-thirds expect no impact from Brexit on how they run their business, they fear the greatest negatives will be brought to bear on hiring, closely followed by the cost and availability of finance.

Securing prompt payment is a domestic issue for most small firms. SMEs generate 82% of their revenues from British customers, and more than half report no export revenues at all. The smaller they are, the less likely they are to export. It is not as though they are chasing elusive overseas creditors, just bullies higher up the supply chain who use delaying tactics to make their margins look fatter for the benefit of investors.

If the UK matched the ratio of payment delays seen in Germany — the country we so often defer to on matters of efficiency and productivity — there would be 25,000 fewer business collapses every year, the FSB estimates.

Brexiteers will cheer that the EU Late Payment Directive has been wholly ineffective at improving matters. Payments between two businesses should be settled within 60 calendar days, but regularly hit 100 or more.

Government efforts to bring in new laws and bulk up existing codes of practice for late payment have run into the sand. Stating that £27 billion was owed to SMEs, a consultation closed last November seeking views about making it easier for trade organisations to challenge practices deemed to be “grossly unfair” on behalf of members.

Meanwhile, we await an industrial strategy that is sure to outline the benefits of clusters of companies of all sizes operating harmoniously in the same sector. This corporate utopia presents an ideal opportunity to restate the terms of trade.

Theresa May has made a big statement about business cleaning up its act, although her corporate governance reforms such as giving workers a role in how companies are run and binding votes on executive pay have encountered significant pushback, and may yet be diluted. 

It is worth remembering the strides that have been made in the past five years in increasing boardroom diversity and investor stewardship.

In the same period, late payment has flatlined and the number of small businesses has soared to 5.5 million, accounting for an ever-larger share of the economy. Playing fair with smaller suppliers could be the most effective governance reform of them all.

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