Why the Prompt Payment Code could be Anti-SME

Changes to the Prompt Payment Code were recently announced by the government in an attempt to further protect small firms from poor payment practices. A reduction of the prescribed invoice payment terms from 60 days to 30 days is intended to tackle the current culture of late payment. CEO of Optimum Finance, Anthony Persse, suggests that in certain circumstances the new rules could actually have a negative effect on small businesses.

The reason that the Prompt Payment Code was initially designed was to combat late payment culture. The new rules announced in January do not do this. Shortening the payment window from 60 days to 30 days arguably makes the likelihood of achieving on time payments more difficult.

Small and medium businesses are the lifeblood of the UK economy. They’re nimble, brave, hard-working, enterprising and they drive much of our nation’s innovation. And this is without considering the fact that they contribute 50% to our GDP and 60% of our employment. Therefore, it is paramount that we deliver the right solutions for them.

The government realised this and their efforts to support and protect small and medium sized enterprises has delivered a huge impact, particularly during the current crisis. There is no doubt that the interventions have helped stave off inevitable insolvencies that could have happened to companies through no fault of their own. However, I do fear that the recent tightening of the Prompt Payment Code rules will be counterproductive in supporting SMEs.

Let’s consider the impact that reducing payment terms to SME suppliers has on a large business. If you have a large organisation with £500m of spend, of which 50% is with small businesses, reducing payment terms from 60 to 30 days could effectively require over £20m of cash to service. Yes £20 million. Imagine what any business large or small could do with £20m. Therefore, it could be a massive disincentive for big businesses to spend with SMEs and influence them to trade with other larger businesses, where longer payment terms are still an option.

These amends can also be seen as anti-competitive. Payment terms are often a competitive element of trading. If two businesses are selling exactly the same product at exactly the same price, but company A offers payment terms of 30 days and company B offers payment terms of 60 days, who is the customer going to choose? Without a doubt, it’s company B. These new rules remove this competitive edge for company B. Businesses should be able to negotiate terms that suit all parties and not have them dictated.

Of course, big businesses mustn’t take advantage of this freedom and issue unreasonable terms of payment. A grocer with high cash generation and quick turn-around on products should pay their suppliers quickly. When we buy apples from a supermarket, we pay for them on the day (likely the day that they arrive in store), not in 60 days or even 30 days.

And it’s not just me who thinks this. Evette Orams, Managing Director of commercial finance broker Hilton-Baird Financial Solutions, believes more emphasis should be placed on supporting suppliers’ cash flow: “The latest changes to the Prompt Payment Code are well-intentioned, but it would be more powerful to give suppliers the ability to comfortably extend credit terms where they’d like to, with the appropriate cash flow support mechanisms in place.

“Even the first 30 days can be significant in terms of the impact of selling on credit terms for any businesses. Therefore, the solution surely lies in promoting the benefits of invaluable tools that provide not only a cash flow boost, but continue to support the working capital of businesses, such as invoice finance.”

Let us be clear, late payments are absolutely unacceptable but there are other ways to get out of the late payment culture. At Optimum Finance, we want to see late payments as a thing of the past. In fact, we want to change the topic of conversation completely and talk about early payments instead.

Businesses deserve clarity, fair treatment and quick communication when it comes to payments. It is possible to have competitive, long payment terms AND get cash from invoices into your business account immediately. Solutions that allow fast access to funds tied up in unpaid invoices paired with bad debt protection already enable businesses to keep cash flowing and have a significant and positive impact on the UK economy. Talk to our experts to learn more about how invoice finance can work for you.

Anthony Persse is CEO of Optimum Finance, a specialist invoice finance company. Optimum utilises innovative market leading technology to unlock cash tied up in unpaid invoices. The experienced and dedicated team of experts are passionate about finding solutions and delivering to clients’ needs. They pride themselves on getting things done quickly and always delivering a facility that works for clients.

Evette Orams is Managing Director of Hilton-Baird Financial Solutions, which is part of the Hilton-Baird Group of companies. As an independent introducing agent, Hilton-Baird’s aim is to identify its clients’ funding requirements and introduce them to the relevant funding solution.

By Anthony Persse, CEO of Optimum Finance.