Payments legislation not working for SMEs


Kimberley Long
Published on:

Efforts to improve the speed of payments being made to small and medium-sized enterprises (SMEs) has not seen success, so technology might be used to fill the gap.

The collapse of construction company Carillion has exposed notable issues being faced by the smallest companies in a supply chain on receiving payments.

Carillion was able to stave off signs of its financial difficulties by consistently paying its suppliers late. In July, the Federation of Small Businesses (FSB) challenged the company on its practices, pointing out the company had signed up to the UK Prompt Payment Code (PPC)

The PPC, from the Chartered Institute of Credit Management, has been signed by more than 2,000 companies. Launched in 2008, signatories of the code state they will pay their suppliers within 60 days, and with 30 days considered the optimum period. They also agree they would provide details to their clients should there be any delay to their payments.

Carillion signed up to the PPC in 2013, but was known for being late on payments, and reportedly did not make some payments for up to 120 days.

The FSB has called for the UK government to enforce stronger terms for any companies signed up to the code. It suggests companies are held to a three-strikes rule, which would see the companies with the poorest payments history struck off and unable to win public-sector contracts until their payments have improved.

These longer payment terms are greatly impacting working capital for smaller companies, but it is unlikely larger corporates will change their payment terms as they look to hold on to their own cash positions.

The issue of late payments is a global problem. The Working Capital Outlook Survey 2017, conducted by working capital marketplace C2FO and published in February, found that during the past year the number of companies reporting delayed payments increased in all of the countries surveyed, and amounted to a quarter of all respondents.

For example, the report found delayed payments had increased in Germany (29%), the UK (30%) and in the US (24%). China (34%) and Italy (45%) have the latest payments of the countries surveyed.

Colin Sharp, senior vice-president of C2FO, says some larger companies have made late payments part of their strategy.

“Since 2008, delaying payment to supplier has proven to be an effective source of cash for many corporates," he says. "This approach has been fuelled by consulting-type organizations showing a buyer that others are paying later and therefore they have the opportunity to pay later as well. 

"All this goes around in a vicious circle. Dynamic discounting and supply chain finance programmes are trying to alleviate the problem for suppliers and give benefit to buyers at the same time.”

Dynamic discounting

Dynamic discounting works by giving the buyers greater flexibility over how and when they pay their suppliers, with a discount often applied to the goods purchased. The buyer can use their own excess cash to obtain discounts, while the seller, and often the smaller company, is paid earlier.

A corporate treasurer at a US-headquartered company explains there are advantages for larger, cash-rich companies in supporting their supply chain.

“We are looking into dynamic-discounting options from a profit and loss (P&L) perspective. It would allow us to leverage cash and receive a better rate of return. It gives us a better cash-management standpoint.”

The treasurer adds: “There is a strategy in place to improve cash conversion. There may be cash on the balance sheet, but it might not be in the right jurisdiction. We can benefit by using dynamic discounting.”

The British Business Bank’s 2018 Small Business Finance Markets report, published on Tuesday, found UK companies are looking to diversify their financing options away from bank lending.

The research found 66% of SME respondents that had sought external finance in the past three years had done so to boost working capital or cash flow.

The numbers further broke down to show medium-sized SMEs with 50 to 249 employees were more likely to apply for external finance for investment than working capital. Companies with fewer than 49 employees were more likely to need funding for working capital than investment. 

That these companies need external financing just to continue their day-to-day operations suggests they are not receiving the financing they need.


Prabhat Vira, president of early payments provider Tungsten Network Finance, says he is seeing a move towards the use of technology to assist with ensuring payments are being made.


Prabhat Vira,
Tungsten Network

“There is a trend in the market as the banks and the fintechs see the benefit of a symbiotic relationship,” he says.

Tungsten has collaborated with BNP Paribas to develop a working capital solution for e-invoicing. The partnership is primarily in the US, but there are plans to expand.  

The service is aimed at companies that need help with boosting their balance sheet rather than cash-rich companies. On the payables side, there is further value-add for the large companies with a large or diverse supply chain.

Vira says: “The goal is to create a one-stop solution combining digital automation and working capital for receivable and payables finance. It allows for easy technology integration and to get the clients on board. The technology aspect is one of the major hurdles to adoption.”

The treasurer says his US employer has been exploring options, adding: “We have been in discussion with C2FO for some time, and are at the stage of understanding the offering and the benefits. We want to understand how it fits into the working capital strategy.”

The treasurer adds that there are benefits for them to redeploy funds, as the current US dollar deposit rate is just 1%.

“It is purely a P&L play,” he says. “The market needs to develop a healthy supply chain. If the suppliers are struggling, dynamic discounting can help them.”

Tungsten’s Vira believes having a push towards digital payments, and the accountability that these traceable transactions bring, will do more than legislation.

“E-invoicing allows for the easy validation of data, and brings the risk element as close to zero as is possible,” he says. “It also removes the cumbersome elements of transporting paper, removing the need for couriers.

“Some countries are beginning to legislate for the use of e-invoicing. Some, like the UK, are strongly advocating for its use. Signatories of the PPC are now being asked if they are aware of e-invoicing, and what they are doing to digitize their supply chains.”