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Challenging the corporate bullies

Can SMEs do anything about big companies imposing unfair payment terms on them?

Challenging the corporate bullies

Thousands of small companies are being financially disadvantaged by larger firms that don’t play fair when it comes to paying invoices.

The Federation of Small Businesses (FSB) estimates that SMEs are owed an average of £6,142 due to practices such as late payment and argues if every payment was made on time 50,000 enterprises could be saved from closure annually1

Late payments are just one of the ways large corporates exploit SMEs when it comes to unfair practices that the FSB calls ‘supply chain bullying’. Some enterprises face unreasonable 120-day settlement terms or find their payment terms have been extended without warning or explanation.

Other tricks up the corporates’ sleeves include retrospective discounting where a reduction in the invoice payment is made for goods or services delivered or additional goods are demanded from the supplier to settle an existing invoice.

Then there’s imposing ‘fines’ for allegedly incorrect packaging. There are reports that some online retailers deliberately schedule clashing delivery slots into their depots to create queues, then fine suppliers for ‘late delivery’. 

“Supermarkets and other large retailers will demand a discount on the price of goods supplied or charge a fee to display or promote them in prime locations inside their stores or to reserve specific shelf space,” explains FSB Senior Policy Advisor Lorence Nye.

“In certain industries and situations longer payment terms can sometimes be justified commercially. Mostly it reflects the imbalance of power in the relationship between large and small firms and the inherent culture of some big players.” 

He adds: “Supply chain bullying tends to affect companies supplying products rather than services. The worst sectors are construction, manufacturing and online and high street retailing – although supermarkets seem to be more reasonable recently.”

All this seems extremely unfair but is there anything that can be done about it?

“Understandably, small firms don’t want to complain and risk losing business that could close them down,” Lorence explains. “Neither they, nor we, have the financial clout to take on corporate bullies in courts.

“It’s a good idea to thoroughly research potential buyers on the Government’s new Duty to Report website, which has statistics on the payment practices provided by firms themselves. 

“You can also talk to other suppliers who deal with your intended buyers and then make informed decisions, but that doesn’t present a real choice if you are tied to a limited number of customers,” says Lorence.

“It’s wise to put cash aside to ride income shortfalls caused by payment problems and it’s now easier to get loans from banks and financial institutions after the wake-up call of the Carillion collapse.”

The FSB is currently compiling league tables of good and bad payers and lobbying the Government on the late payment issue. It has welcomed last month’s announcement from the government that it intends to crack down on bigger businesses which have poor payment practices towards their smaller suppliers and contractors.

“Ministers have listened to FSB’s calls to make company boards accountable for their payment practices; to increase the powers of the Small Business Commissioner; and to strengthen the Prompt Payment Code,” says Lorence.

But for one entrepreneur, who asked not to be named, action cannot come soon enough. His small enterprise supplies specialised products to several large high street chains. One buyer switched his payment term from 30 to 75 days for payment with notice. They charge him 2.5% of the invoice value for making 'prompt payment' and regularly charge £250 for ‘delivery non-compliances’ which, he says, usually turn out to be compliant.

“It’s costing me thousands of pounds a year plus overdraft charges,” says the business owner. “To be honest, the only real answer is new legislation.”

1. FSB, 16 November 2016.

The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.