Late payments like "crack cocaine" for large businesses
Large corporations are relying on late payments and governments must better understand the scale of the problem, says Duncan Swift, new president of R3, the trade association for the UK’s insolvency and restructuring professionals.
“It’s a selfish motivation because if everybody was doing it and it became widespread, and I would say in certain industries it is an endemic problem that causes structural problems throughout the sector where you can end up with situations where otherwise healthy businesses that are good businesses keel over, because they are starved of cash,” he says.
Research by Begbies Traynor shows that 34% of businesses which went into insolvency had debtor days in excess of 57 days. Swift went further saying that “because late payment is the underpinning of that adage cash is king and most insolvency events in the Uk are caused by lack of cash not by lack of profit.”
Swift says there is a need for “governments and other policy makers to actually understand that late payment is for those that are the late payers can be quite a bit of a drug. I would go so far as to describe it as the crack cocaine for larger companies.”
“Because late payment is in the hands of the late payer, that money is free money. They don’t have to borrow it from a bank with a rate of interest on it and they don’t have to have it supplied by shareholders with an equity return on it. It’s working capital funding free of charge to grow their business. Which is quite a powerful motivation for any single business to wish to pay late,” Swift explained.
Billions of pounds, but voluntary regulations
Swift points out that government initiatives like the Prompt Payment Code, in which businesses commit to paying within 60 days with the aim of halving that to 30 days, are voluntary. “At the moment the sanctions don’t fit the extent of the problem. The small business commission is not in the position to fine.” He says.
“Recently the small business commissioners named and shamed some companies it had investigated, and the Prompt Payment Code expelled 11 contractors from its books. That’s a reputational hit, is it going to make much difference to the big corporate late payer? Probably not. The problem with the drug benefits to the large late payer is that it’s difficult to wean them off it.”