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Page 2 Contents
Page 3 Introduction / About the Money Advice Trust
Page 4 Introductory comment
Page 6 Responses to individual questions
Page 12 Contact details
The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money with confidence. The Trust’s main activities are giving advice, supporting advisers and improving the UK’s money and debt environment. In 2017, our National Debtline and Business Debtline advisers provided help to more than 220,000 people by phone and webchat, with 1.5 million visits to our advice websites. In addition to these frontline services, our Wiseradviser service provides training to free-to-client advice organisations across the UK, and we have now delivered training and consultancy to more than 160 creditor organisations on identifying and supporting customers in vulnerable circumstances. We use the intelligence and insight gained from these activities to improve the UK’s money and debt environment by contributing to policy developments and public debate around these issues.
Please note that we consent to public disclosure of this response.
Although this call for evidence is primarily addressed to small businesses, we are responding to it because many of the people we help at Business Debtline, who are self-employed or run small businesses, have experienced issues with late payments. We provide our insights into the problem based on our experience with the people we help. In 2017 Business Debtline helped 29,200 people on the phone to tackle their debts. We helped a further 7,100 people through our webchat service. In addition, there were 167,300 visits to the Business Debtline website. We recently published a new report, Taking Care of Business, which takes insights from our Business Debtline service. In the report, we identified late payments as one of eight key challenges self-employed people and small businesses face today. Unfortunately late payments is not a new issue, neither is an easy one to tackle. For many people who are self-employed and other small businesses owners, even if they have regular clients and plenty of work, it is not always certain that they will be paid for these jobs on time. Different customers, including large firms, public sector organisations and other small businesses have different policies and practices that affect how and when they handle payments. Uncertainty about payments can cause significant cash-flow issues for small business owners. It can affect their ability to pay their tax, their business debts, and their household expenses including rent or mortgage, utility bills and basic household services. We asked our Business Debtline clients about their experience with late payments. Nearly half of the surveyed clients (45%)1 said that they had experienced problems with late payments at some point. Problems with late payments were common for both sole traders and company directors. The respondents provided examples of late payment issues they had experienced. Some said that late payments were common in their trade, for example artists. Some said that late payments were the result of having a ‘bad client’, with a small number of respondents naming large companies or local authorities owing them money and delaying their payments. A very small number of respondents said that it was because the customer had defaulted or because of the customer being overseas. From the responses given by Business Debtline callers in our research, and from the experience of our Business Debtline advisers in helping callers to resolve these issues, it can be concluded that late payments are generally not the reason for entering financial difficulty in the first place – but rather that late payments and the cash flow issues they create can exacerbate debt problems by making it more difficult to pay bills on time. With self-employment now standing at 15% of total UK employment and small businesses helping to drive the UK economy, we believe that reducing late payment is essential for supporting small business growth.
1 Business Debtline, Annual Impact Survey 2017
We consider it necessary to further strengthen protection against late payment and non-payment.
An improved payments culture could reduce cash flow issues that many of our Business Debtline clients currently face.
More support and advice is necessary to raise awareness for small business owners about their rights and their options for chasing invoices when it comes to late payments.
As we recommended in our Taking Care of Business report, the Prompt Payment Code should become mandatory and the Small Business Commissioner should be empowered to fine persistent late payers.
Although public sector arrangements are not the subject of this call for evidence, we believe that the government should also expand the remit of the Small Business Commissioner to cover disputes involving late payments by public sector bodies.
Please note we have only responded to the relevant questions i.e. those questions not directed solely at small business owners.
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Based on our experience of running Business Debtline, we consider the following to be amongst the
drivers of late payment problems: Imbalance of power between businesses: Larger companies
have significant power over small businesses in their supply chain. Because of their size and
reputation, they are confident that smaller suppliers will not challenge them for fear of damaging the
business relationship.
Competitive advantage: Callers to Business Debtline report that some larger companies use late
payments as a business tool, to manage their own cash flows.
Complex invoicing procedures: Administrative inefficiencies, complex invoicing procedures and
payment methods can all cause delays to some extent in payments, if not managed properly. A client
being overseas or a supplier not having certain payment methods in place can affect the timing of
payments (e.g. using online banking instead of cheques or cash).
Cash flow issues affecting the payers themselves: Finally, late payments are often the result of
cash flow issues affecting the payers themselves. Cash flow issues can affect their ability to pay their
suppliers on time. Companies can go bankrupt without first having paid their suppliers with small
suppliers remaining unprotected in such events. Here the interaction between small businesses in
financial difficulty is key – with the risk of a ‘domino effect’ of late payment-related problems
cascading through supply chains.
Based on the experiences of Business Debtline callers, we see that late payments can potentially impact on all of the above.
Late payments are not usually the reason for our clients falling into debt in the first place. However, late payments and the cash-flow issues they create can exacerbate debt problems by making it harder to pay their business bills on time, further worsening their debt problems. It is not uncommon for our Business Debtline clients to use personal credit to pay for essential business costs – 61% of our surveyed Business Debtline clients had used personal credit to pay for essential business’ costs such as stock and supplier costs, energy and telephone bills and travel costs in the last two years. Self-employed people and other small business owners often find it more difficult to access credit and thus they use personal credit such us personal loans or bank overdrafts for supporting their businesses. An improved payments culture could reduce cash flow issues that many of our clients currently face and subsequent debt that from taking out too much credit to pay for essential business and household costs.
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We welcome the establishment of the Small Business Commissioner, which provides advice, information and support to small businesses on essential matters relating to late payment issues. We have been pleased to engage with the Small Business Commissioner on several issues since he was appointed, and look forward to working more closely with the Commissioner and his team in the coming years. As a result of these interactions, we have every confidence that the establishment of the Small Business Commissioner will make an appreciable and positive difference to payments culture. We also agree that that payment practices reporting can impact on reputation and trustworthiness of firms when establishing new customer relations and business partnerships. However, we believe the government should go further by expanding the powers and remit of the Small Business Commissioner, and enshrining the Prompt Payment Code in law. As we concluded in in our recent Taking Care of Business report:
We recommend that the government should enshrine the Prompt Payment Code in law and give more powers to the Small Business Commissioner, as has also been recommended by IPSE and the IPA.2 Prompt Payment Code standards that payments should be made within 30 days and that no business should be ever been paid more than 60 days after completion of work should become mandatory. The Small Business Commissioner should be empowered to fine persistent late payers.
Secondly, we hear from our Business Debtline clients that many small business owners also
experience late payments from local authorities and other public sector organisations, in. Therefore as we recommended that the government should expand the remit of the Small
2 The Association of Independent Professionals and the Self-Employed and the Involvement and Participation
Association, Working well for yourself, July 2018
Business Commissioner to cover disputes involving late payments by local authorities, NHS organisations and other public sector bodies.
In our view, the legal definition of ’grossly unfair‘ is problematically vague and thus open to interpretation, making it more complex for a small supplier to challenge late payments. For example if a small supplier took a client to court, it is often very difficult to predict the outcome given that “grossly unfair” is subject to interpretation on case by case base. A review of this definition would be welcome.
Legislation gives suppliers the right to charge interest on late payment and reclaim administrative costs for chasing late payment. Theoretically, this offers protection to small businesses from late payment. However, we think it is difficult to work in practice for the following reasons. Lack of essential business management skills: In our recent report Taking Care of Business, we identified the gap of business management skills and knowledge as one of eight challenges people who are self-employed and small businesses owners face. People do not always come prepare to start their own business. They might be aware of their rights and the options available to them for essential matters such as how to handle late payments. Even if people are aware of their rights and the options available to them, they might not know how to charge interest for late payments. For example they might find it difficult working out how much interest to charge or they might struggle with the administrative process – they might not be aware of or have suitable tools such as software or templates to process that quickly. Client relationships: Small business owners are also often concerned about damaging their relationship with a customer – that is particularly important on early days of setting a new business or becoming self-employed, when people are building new client relationships or if they rely on a single client. Cost: Cost, both in terms of money and time can also be an issue when charging interest. In order to make this mechanism more effective we think that people need more support to understand their rights when it comes to charging interest for late payments and how that works in practice. Having a streamlined process in place, which people can easily follow when they need to charge interest for late payment, would be helpful – for example having templates and appropriate software tools that will enable them to calculate charges – so that they can act quickly and confidently in cases of late payments. Costs both in terms of money and time should be minimised in order to make charging interest an attractive and simple measure for small businesses to use. Improved access to specialist advice and support could help to reduce cost. Charging interest does not reduce the risk of late payment so it can still significantly affect cash flows for small businesses. This will only ever be a part of the problem, therefore we believe that the focus should be on measures that incentivise companies to significantly reduce late payments and hold them accountable for them.
The Prompt Payment Code contains a strong set of standards; however as set out in the call for evidence document, there have been cases of misbehaviour by signatories. We believe that the Small Business Commissioner joining the Compliance Board is a positive step as well as the reporting on signatories that have breached and been removed from the Code. However, late payments have been a perennial issue and despite legislative measures and additional measures such as the Prompt Payment Code the issue remains a significant one. Therefore we think that more needs to be done. In line with our recommendations in our Taking Care of Business report, which we have already set out, we feel that protection against late payments should be enhances. We recommend that the Prompt Payment Code should be made mandatory and the Small Business Commissioner should be empowered to fine persistent late payers.
Small businesses can be reluctant to identify breaches in the Code often because of fear of damaging their relationships with bigger business. Also, they might not be aware of the Code. Sector and trade bodies should provide more support and raise awareness with their smaller members. We think that good practice and standards are a good starting point but we consider that more needs to be done. As we set out, we believe that the Prompt Payment Code should become mandatory.
Yes, we believe that moving the Prompt Payment Code to become the responsibility of the Small Business Commissioner would be a positive step, in addition to strengthening the Code as we have outlined.
As we have already noted, small business owners might not always be aware of their rights and options for dealing with late payments. We believe that sector and trade bodies should be encouraged and supported to provide more support, advice and raise awareness with their members, for example by improving signposting about where they can get advice and the options available to them for chasing late payment. They should also encourage their bigger members to sign up to the Prompt Payment Code and speak to the Small Business Commissioner to provide their perspective and reasoning for late payments. As the organisation that runs Business Debtline, we see it as a significant part of our role in helping tens of thousands of small business owners in financial difficult a year to raise awareness of the Small Business Commissioner, and ways of dealing with late payments. Providing advice on late
payments has long been an integral part of our Business Debtline advice process, and we are keen to continue to evolve this.
We do not have experience from other countries to share.
We believe the following measures could also be beneficial in addressing late payment terms.
Adoption of new technologies: Technology can play a vital role in reducing administrative inefficiencies, complex invoicing procedures and payment methods for example using online banking instead of cheques or cash.
Invoicing: Small businesses should provide clear and transparent payment terms about
when and how payments should be made in their invoices. Early issuing of the invoice can help to reduce the length of payments.
Sector and trade bodies: Sector and trade bodies could have a more significant and active
role in promoting good payment practice by increasing awareness with their members. Further they should provide more support and advice to raise awareness for small business owners on their rights when it comes to late payments and options for chasing invoices.
The government’s recent introduction of legislation to require all large companies to include in their annual report a statement of how directors have had regards to the need to foster the company’s relationship with stakeholders including suppliers is a positive step. We believe that this measure will offer better insights to the Board and make it accountable for the firm’s relationship with its suppliers – to avoid reputational damage. Thus it can have a positive impact towards the firm’s payment behaviour. Compliance with this requirement should be monitored, and further measures to ensure that payment behaviour is considered at board level should be encouraged – for example, by the voluntary appointment of Board Members as ‘supply chain champions’. This is an initiative that the Small Business Commissioner would be well placed to co-ordinate.
While we appreciate that even though technological advancements can streamline processes associated with payments, we are not certain to what extent small business owners are currently aware of such processes and to what extent they have the financial resource and skillset to adopt them. For example the lack of trained personnel, the cost and the time that may be needed to
introduce such changes, might make it difficult for smaller businesses to switch to new processes and ways of payment, which will reduce the risk of late payments. In addition, the adoption of digital technologies amongst small businesses appears to be slow as people still have concerns around the skills required, the cost of adoption and security.3 Sector and trade bodies should do more to support their smaller members by raising awareness about how technology can help them but also with the take up of technologies. Despite these reservations, it is clear that technology has the potential – over time – to bring benefits to some small businesses affected by late payments, and active encouragement of innovation in this space by the government and Small Business Commissioner would be welcome.
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We believe that industry and sector bodies should take action in all of the above areas in identifying and encouraging good payment practices within their sectors. Sector bodies could have a more significant and active role in promoting good payment practice by increasing awareness with its members. The Small Business Commissioner has been highly active since his appointment in liaising with sector bodies and it is clear that the Commissioner should continue to play a co-ordinating role in the future.
3 Juergen Maier, Made Smarter Review, 2017
The Money Advice Trust
21 Garlick Hill
London EC4V 2AU
Tel: 020 7489 7796
Fax: 020 7489 7704
Email: [email protected]
www.moneyadvicetrust.org
