Supply chain bullying affects almost one in five small businesses says FSB
One week after the Premier Foods ‘pay to stay' scandal and the FSB has uncovered further alarming evidence of supply chain bullying. In a new survey of 2,500 members almost one in five (17%) said they faced supply chain bullying in one form or another in the past two years.
The results indicate a serious deterioration of payment practices much wider than ‘pay to stay'. The FSB is calling for a toughening up of the Prompt Payment Code, as well as fresh measures to stamp out the most heinous examples of bad practice like retrospective discounting and ‘pay to stay'.
The Prompt Payment Code should be a key tool in improving payment culture. The Government has promised to toughen up the code. The FSB wants to see any company looking to supply the public sector to extend the governments standard 30 day prompt payment terms to their own suppliers. Small businesses want 60 day payment terms to be set as an absolute maximum for any business signed up to the Prompt Payment Code. If a company will not agree to 60 days they should not be allowed to sign up.
As part of the FSB research, businesses were asked to give examples of the most common poor payment practices they had to deal with including pay to stay. The FSB has used these examples to create a list of the five most resented payment practices in use across the UK today:
1) Flat fees – ‘pay to stay'
Also known as ‘supplier assessment charges' or ‘supplier investment payments,' these are flat charges which companies levy on suppliers either as a requirement to be on a supplier list, or packaged as an investment into hypothetical future business opportunities. It is often indicated that non-payment will result in de-listing. New research has indicated that more than a quarter of a million (260,000) businesses could be facing so called ‘pay to stay' charges after five per cent of businesses surveyed said they had been asked to make a payment by a customer or face de-listing.
2) Excessively long payment terms – ‘pay you later'
In 2011 the EU issued a directive requiring all businesses to pay their suppliers within 60 days, or face interest payments on money owed. However, the UK implementation of the directive allows businesses to agree longer terms "provided it is not unfair to the creditor." This has led to many companies insisting on payment terms of 90 or even 120 days. In effect this becomes an interest free loan from firms in the supply chain to large companies with excessive payment terms.
3) Exceeding payment agreements – ‘late payment'
As well as insisting on long payment terms, many companies are routinely exceeding agreed terms, or changing terms retrospectively to allow them to miss agreed payment dates. Also thought to be common is the practice of extending payment dates if money is owed on, or close to, the end of a financial reporting date in order to smooth a big company's balance sheet.
4) Discounts for prompt payment – ‘one for you, one for us'
Prompt payment discounts are arbitrary discounts big firms give themselves for paying early or even just on time. For example, a firm that has agreed to pay 120 days following receipt of an invoice may also apply an automatic discount of 3% if they pay on or before the 120th day.
5) Retrospective discounting – ‘balance sheet bonuses'
Some firms seek to apply retrospective discounts to outstanding money owed to a suppler. This involves the company effectively changing the terms of the contract signed with the supplier after a contract has been agreed. Methods used to extract these vary, but include threats of de-listing, withholding payment, ‘marketing contributions' and previously un-agreed discounts applied to specific volumes of business.
John Allan, National Chairman, Federation of Small Businesses, said:
"When the public think of their favourite brands, they are unlikely to connect them with the sort of immoral payment practices which are becoming all too common across an increasing number of industries. However, it is clear that whenever these examples come to light, the public shares the same sense of moral outrage as the small firms that have to put up with them on a daily basis.
"The Government has indicated that they are prepared to do more to improve the culture of payment practices in the UK and they are right to do so.
"The sense I get from talking to our members is that small businesses are fast approaching the breaking point. They are no longer prepared to put up with these sharp practices. Brands that think they can continue to squeeze their suppliers with impunity may get a nasty shock when what they are doing comes to the attention of their consumers."