Large firms using late payments as free loans from smaller companies

Despite an EU directive to prevent companies from dragging their heels on supplier payments, many larger firms continue to implement long delays that act as unofficial loans, says Jack Large.

The author of Cash & Treasury Management File reported that 18 out of 21 European countries surveyed by credit management company Intrum Justitia had suffered loss of income due to excessively long payment lead times, and that the situation had either stayed the same or actually worsened over the past year.

Half of respondents also agreed that late payments negatively affected their liquidity and inhibited their company’s growth.

The EU directive, introduced in 2011, states that public and private sector organisations must pay their suppliers within 30 and 60 days respectively, but many companies continue to flout the rules.

Smaller suppliers are typically the worst affected by poor payment terms, as the disruption to their cashflow is typically much greater, and they often lack access to funds to plug the gap. Small companies often lack negotiating clout with their larger customers.

Meanwhile, bigger firms, which are far better able to take advantage of current cheap borrowing options in Europe, appear to be treating their bills as free credit suggests Large.

Extending payments terms by large companies is, in effect, borrowing from their suppliers who are often small businesses,” he says.

At the same time, many squeeze their suppliers even further by offering to pay sooner in return for a discount.

While this may carry short-term financial benefits, in the long run it could seriously hurt their businesses by damaging relationships with the best suppliers.

As Large asks: “What is [this behaviour] doing to the health of their supply chain?”

In the UK, nearly half of SMEs have struggled with late payments – and the government is one of the worst culprits. The Federation for Small Businesses (FSB) has repeatedly raised concerns over the estimated £39.4 billion that is owed to smaller companies in late payments, stressing the damage that this does to the financial health of the country’s business sector.

If you could get that money back into small businesses as working capital to build on the recovery, increase training, it all flows through,” said FSB Chairman Mike Cherry. “Government has really got to take a much greater lead on this.”