Michael Fallon has written to all companies listed on the FTSE 100 and FTSE 250 share indices to encourage them to sign up to the Prompt Payment Code, a voluntary agreement promoting good payment practices. The names of companies which do not sign up will be publicised in the New Year, he said.
"Late payment causes real cash flow problems for entrepreneurs," Fallon said. "It stops them from growing their business – we need to change the culture. Too many of our biggest companies are ignoring the Prompt Payment Code. My message to them is clear – make prompt payment a priority or face the consequence of being named."
The Prompt Payment Code was set up four years ago by the Institute of Credit Management. Signatories to the Code are obliged to pay suppliers within an agreed time, and to make sure that there is a proper process in place for any issues that may arise. Although 1,182 companies are currently signed up to the Code, only 27 FTSE 100 companies and five FTSE 250 companies are signatories.
Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that encouraging large businesses to sign up to the Code could have a positive impact on businesses in the supply chain, many of which were small and medium-sized enterprises (SMEs).
"Although SMEs currently have the right to claim interest and compensation in the event of late payment, these rights are rarely relied upon for fear of losing a large customer," he said. "It is encouraging that, at a time when the plight of SMEs is greater than ever, some of the UK's largest organisations could be liable for the cost of something much more valuable than interest charges and compensation – now it is their reputations that are at stake. Nobody will want to be seen as holding back the UK's economic recovery."
However, he added that more needed to be done to "install a culture of prompt payment" within some large businesses.
"SMEs need more than just a signature, they need large organisations to put their bargaining power to one side and settle invoices in good time on a regular basis," he said. "This will help to ensure that SMEs across the UK have the cash flow they need to continue as a going concern."
Fallon's letter is the latest public indication of the Government's intention to speed up payment to suppliers and improve access to finance further down the supply chain. Prime Minister David Cameron recently called on large businesses to sign up to supply chain finance (SCF) schemes with banks, which will allow suppliers to immediately borrow against invoiced funds that have been approved for payment.
The Government recently consulted (30-page / 191KB PDF) on how best to implement new EU late payment laws, due to be transposed into national legislation by March next year. The Late Payments Directive requires public authorities to pay their suppliers within 30 calendar days of receipt of an undisputed invoice, while payment terms for business to business payments as fixed in the contract cannot exceed 60 days unless otherwise expressly agreed.
Current UK laws set three levels of compensation for late payments according to the value of the payment due, which may be replaced in future by a single €40 minimum as set out in the Directive. Suppliers will not be prevented from seeking to claim additional recover costs if they choose to do so.
As part of his announcement, Fallon encouraged suppliers to agree payment terms with their larger customers before delivering orders and to pursue late payers under existing compensation laws. He also urged them to use electronic invoicing whenever possible, automating the process and providing instant verification that the invoice has been received.
The current default UK position is that, where no terms are agreed, payment should be made within 30 days. However, according to the latest research by payment organisation Bacs, owners of small and medium-sized enterprises (SMEs) are currently waiting an average of 28 days longer than their original payment terms to have invoices settled. Large companies are the worst offenders, accountable for 48% of late payments reported by SMEs, according to the research.
Phil Orford, chief executive of the Forum of Private Businesses, welcomes the announcement.
"All too often we see a 'domino effect' of late payment right down the supply chain," he said. "It decimates cash flow and forces many firms into administration – so it is important that we do whatever it takes to reverse this trend and set in motion a culture of prompt payment for small businesses and the economy as a whole."