The prompt payment code, explained.
The problem of late payment has been widely publicised in the last few months, with an increasing number of small and medium-sized enterprises (SMEs) struggling to make ends meet. Despite government guidance that encourages small businesses to charge interest and claim debt recovery costs on late payments, many are understandably reluctant to rock the boat.
The Prompt Payment Code was introduced six years ago to reduce the scourge of late payments, but many SMEs believe the voluntary Code still lacks teeth. Currently, the Code has only attracted 1,700 signatories. With an estimated 4.9 million businesses in the UK, you soon see the true scale of the problem.
A method of improving cashflow
The Prompt Payment Code was introduced in 2008 as a method of improving the financial stability of UK SMEs by helping to regulate their cashflow. There were too many financially viable businesses being forced into administration and liquidation, or recovery practices such as company voluntary arrangements, simply because larger corporations were withholding payments for as much as 90 days.
Unfortunately, research has shown the Prompt Payment Code to be hopelessly inadequate in its current form. Not only is there a complete lack of sanctions against businesses that fail to comply with its modest terms; there’s also the small matter that becoming a signatory of the Code is completely voluntary.
Time for change
With profitability and cashflow still affected by late payments and small businesses being pushed towards the brink of insolvency, the government has finally committed to act. Promises have been made and draft legislation has emerged which will eventually force companies to publish information about their payment terms. Not only is this measure intended to shame late paying corporations into cleaning up their act; it will also help SMEs make more informed decisions about who they choose to supply.
While this is certainly a step in the right direction, small businesses are also calling needs for penalties to be imposed for failing to adhere to the terms of the Code. There must also be realistic, steadfast rulings, rather than guidance, that dictate precisely what payment terms are deemed as fair.
Jeopardising the economic recovery
After years in the doldrums, the UK economy is finally a healthy and prosperous place to be. However, in practice, much of this prosperity is being enjoyed by large businesses, while SMEs continue to struggle. This view is bolstered by the latest research from Bacs Payment Systems, which has found small and medium-sized companies are owed nearly £40bn as a result of late payments, putting their very future in doubt. Hopefully the government’s second crack at the Prompt Payment Code will carry enough bite to resolve the UK’s late payment inequality.
Unfortunately we do see the smaller company finding itself in trouble and unable to pay their own staff with directors often foregoing their own salaries simply because they are paid late by a larger company, usually with leverage. The leverage comes when the smaller company places far too much trust in the larger company and they really should spread the risk around by diversifying. Try not to put all your eggs into one basket and don’t deal solely with one large company it is a ticking time bomb. Try not to provide services for business – can you supply your services direct to consumers? If you are B2B then try and work with differing sectors.
If you’re struggling to deal with looming business insolvency as a result of late payments, we can often negotiate a formal company voluntary arrangement or informal solution to help put your business back on track. Contact Jameson Smith & Co today.
Written by: Mike Smith