Time to discover the joy of giving - on time

Gary Hicks looks at proposed measures to encourage prompt debt payment by large companies to SMEs.

While Christmas, the traditional season of financial indulgence, may not seem the best time to think about paying trade debts on time, it might at least stimulate a new year's resolution.

It is certainly needed in the UK, where late payment is often seen as legitimate debt management.

It is also often the case that the larger the business, the larger the debt. True, most firms would claim that such behaviour is unethical, and business people who flout payment terms risk losing their reputations.

That was indeed the main conclusion of a recent survey by the Department of Trade and Industry-supported Better Payment Practice Group.

Eighty-five per cent of the 1,652 respondents said that paying late was both morally wrong and unsound business.

A bad reputation may be developed, relationships with suppliers damaged and less attractive credit terms incurred, because late payment is often a sign of financial difficulties, leading to business failures and job losses.

There are signs that business attitudes may be changing, with firms becoming better at actively managing cash flow. This should, in time, improve the general commercial payment culture.

But there remains a marathon to run to prevent late payment of debt by large firms, the bane of the life of small companies.

Five years ago the government was so concerned that it brought in the Late Payment of Commercial Debts (Interest) Act, which the then small-companies minister Barbara Roche labelled "a catalyst for change".

The well-intentioned idea was to ensure that sales by SMEs to large customers are paid on time, with 'fines' in the form of automatic interest on tardy payers if the time limit is exceeded.

Unfortunately, successive surveys have shown that this has not happened, and for a very simple reason. On the surface, a statutory right to interest on late payment looks wonderful.

The problem is that large firms can get round such laws by negotiating better terms. At the same time, smaller firms can come under pressure from their suppliers even though they are not getting paid more quickly.

That is why, with the Confederation of British Industry and others, we argued that the voluntary approach would be better than law.

Making quoted firms publish payment records in annual reports and ensuring that public-sector bodies set an example in their payment practices were among the moves suggested.

In the long run, I suspect that such simple measures will be more effective in combating the late payment culture.

Gary Hicks is head of public affairs at Atradius.