PAYMENT - That'll be the pay

The government is about to launch a bill aimed at protecting small businesses from going bust as a result of late-paying customers. But the very people it is trying to shield could well be the ones who lose out.

Every year, according to the Federation of Small Businesses (FSB), businesses from going bust as a result of late-paying customers. But the very people it is trying to shield could well be the ones who lose out. about 40,000 UK businesses go to the wall. A frightening 80 per cent are expected to go bust within five years. Research from the Department of Trade and Industry (DTI) identifies about 2.5 million small businesses in the UK - those with less than 50 employees - which employ 50 per cent of the UK workforce and account for 42 per cent of GDP.

In the UK, 75 per cent of small businesses have less than #100,000 annual turnover and 93 per cent have less than 10 staff. This group, which includes many of the UK's smaller dealers, is financially the most vulnerable business sector in the UK.

There are a number of reasons why so many small businesses are liquidated in their first few years. Accountant John Alexander at Pannell Kerr Forster says too many dealers start up with 'a gold card and #10,000 overdraft and are frankly under-capitalised'. There is another problem: in the first few years of trading, dealers will almost certainly have to deal with customers who stretch out payment for their own reasons.

For small dealers, perhaps undercapitalised and struggling with falling margins, late-paying customers can be the final nail in the coffin. A representative for FSB says: 'Late payment of debt is not necessarily the main reason that small companies go out of business. But for many, it is the straw that breaks the camel's back.'

It is no coincidence that so many dealer liquidations happen at the end of the tax and financial year. Dealers that have been over-trading may well find themselves unable to get the money in.

One potential weapon in the small dealer's armoury is the government's Late Payment of Commercial Debts (Interest) Bill, which for the first time will allow small businesses in the UK to claim a statutory right to interest on late-paid debts. The bill gained Royal assent earlier this year and will become law in November. It sets out a phased approach to the right to interest. In the first stage, the right to claim interest - which has been set at base rate plus eight per cent - will go to small businesses supplying large enterprises, including public sector customers.

In autumn 2000, the right to interest will be extended to small suppliers with smaller customers. Eventually, the right to claim interest on debts will include all suppliers against all customers, regardless of either's size. The aim is not to hit small businesses, which themselves may be late payers, in one go.

Small Firms Minister Barbara Roche is taking a hard line on late payment, maintaining that stalling is bad business practice. 'Any business that pays late as a matter of course is effectively saying it is acceptable to abuse the provision of trade credit and the good faith of its suppliers,' she says.

The problem with giving small suppliers the statutory right of interest is in the small print. The government says it wants to encourage businesses to agree their own contractual terms, under a scheme that adds the right to interest to existing suppliers' contracts. According to the DTI, the bill includes safeguards against contracting out, to avoid customers bypassing bills by setting low interest rates or long payment times.

But it is not yet clear whether these measures will be sufficient to protect small suppliers. There is no minimum debt size and the bill sets a default credit period of 30 days from delivery of the invoice or goods, whichever is the later.

Although the legislation should help small dealers get paid by larger suppliers, it could cut the other way. Figures from Dun & Bradstreet Computer Market Intelligence Centre (CMIC) show that the top third of dealers, which have the longest credit histories and the longest, happiest relationships with distributors, are taking longer to pay. At the upper end of the channel, in 1996 dealers took an average of 44.4 days to settle accounts, compared with 38.9 days in 1994. This may be due to distributors becoming more flexible, but it also means that when the right to interest falls to all businesses, dealers will themselves be hit.

The other view is that the bill will have little or no effect. Good customers pay on time and do not need to be threatened, while bad customers - if the dealer does have to deal with them - will do their best to get out of it anyway.

Brian Burke, manager of Dun & Bradstreet ComputaNet at CMIC, says: 'The problem is this bill doesn't change the power relationship between a small supplier and a big customer. Having the right to collect interest and being able to apply it are two very different things.' The key point, he says, is that small dealers will find it difficult to issue interest demands to large customers: they need the business.

Many small dealers may well decide that chasing base-rate plus eight per cent through the courts is not worth the time or the expense involved.

Small businesses tend to have few illusions about the time it takes to get a large supplier to cough up and observers say late payment delays are factored in when a job is priced up in the first place. Chasing interest also involves issuing repeat invoices and filling in small claims forms.

The FSB says it too has reservations about the bill, namely that it will do nothing to change the supplier/purchaser power relationship.

But it sees it as just one of a number of initiatives that will work together to change the late-paying culture. The FSB is working with Dun & Bradstreet and the DTI to create a 'league table' of late-payers among Britain's largest companies. The FSB will shame the worst payers in the UK much in the same way that the environmental lobby targets the big polluters.

The idea, says FSB, is to change the culture of late-payment by persuading shareholders that paying supplier bills late is costly and inefficient, rather than good business practice.

Lloyd's of London estimates that about 20 per cent of business payments in the UK are made late and less than two per cent of financial directors in large UK companies, who would be liable for the statutory right of interest, understand the implications of the bill. It may yet provide a radical shake-up of UK business practice.

As always with UK legislation, there is a European angle too. Earlier this year, the European Commission tabled draft legislation which, if passed, would require the settlement of commercial transactions within 21 days, unless a contract stipulated otherwise. As with the UK bill, customers would be hit by interest charges if they failed to pay on time and all countries in the EU would be required to pass legislation ensuring that the supplier retains title, or ownership, to the goods until payment is made in full. The UK bill moves this forward, setting less stringent targets, but it does raise the issue of different debt laws within Europe.

Many European countries have a more efficient payment culture than the UK. For instance, Finland and Norway have a contractually agreed credit period of 19 to 21 days.

According to a DTI representative, the UK right to statutory interest applies wherever the contract has been made in accordance with UK law.

This means UK suppliers would have a right to chase the outstanding interest against customers in other countries, through the UK courts. 'It's a case of where the jurisdiction of the contract is,' says the DTI. There are wider moves being made with European countries to offer a streamlined way of resolving cross-border small claims disputes, and the UK legislation is designed to fit alongside these moves.

Geoff Hoon MP, parliamentary secretary in the Lord Chancellor's department, warned last month that failure to harmonise small claims disputes within Europe would be an obstacle to the internal market. It would currently not be practical or cost-effective for a UK dealer to chase a European customer through the small claims court. Hoon said the UK government would make harmonisation of small claims disputes across Europe a priority.

The current ceiling in the UK for small claims is #3,000 and the government is considering raising it to #5,000.

The Late Payment of Commercial Debts (Interest) Bill is not designed to come in with too much of a bang, nor is it intended to come as too much of a shock to companies, particularly in the early days. The bill must be viewed as part of a package of measures whose aim is to change the culture - and acceptability - of late payment. For dealers, the bill is a double-edged sword because they face the prospect of being pursued by their suppliers, just as they can pursue anyone they have supplied with product. But anything that gives the 2.5 million small businesses even limited means to defend themselves is at least a step in the right direction.

A fresh look at payment culture

Last month saw the launch of the Better Payment Practice Campaign in the run-up to the Late Payment Bill. The aim of the campaign, a joint initiative between the public and private sector, is to turn around the UK's payment culture.

The Better Payment Practice Group, whose 13-strong membership includes the DTI, the Institute of Directors, the Federation of Small Businesses and the Institute of Credit Management, is introducing a series of measures to support small businesses tackling late payment. They include:

- A Better Payment Practice Code outlining good payment procedure. It will build on the existing CBI Prompt Payers Code

- A Better Payment Practice Kitemark for businesses that adopt the code

- A free guide to credit management and better payment practice

- A Website with credit management and debt recovery information

- A PR campaign highlighting the economic reasons to pay on time

- A guide to the Late Payment of Commercial Debts (Interest) Act

Payment cards

The idea of a payment card - a corporate purchasing card - is a simple one. The card is issued to the customer, the customer pays the supplier and the card issuers, such as AMEX and Visa, guarantee payment to the supplier within three to five days. The whole purchasing function is streamlined, there are no delays while cheques sit in in-trays waiting for signatures, and the move to pay the supplier is driven through. It is estimated that a large purchasing department may have to deal with up to #100,000 per year, so anything that cuts down on it has to be good news.

The downside is that both the supplier and cthe customer can end up paying a fee to the issuer for use of the card. And with distributor margins often hovering around the two per cent mark, it does not require too much cash to be taken out by the card issuer to destroy the value of the sale.

The advantage is that the card can free up cash for other things that might be more pressing.