Recommendations from a cross-party committee of MPs for toughening up the UK's late payment regime have been welcomed by a South East business insolvency expert.
Mike Pavitt, Chair of R3's Southern Committee was speaking after the Business, Energy and Industrial Strategy Select Committee issued a report criticising "disgracefully" bad payment practices, especially within larger companies, and called for all medium and large companies to be forced to sign the Prompt Payment Code.
Research carried out by R3 earlier this year found that late payment of invoices was the most common sign of business distress among companies in the South East with more than a third (35%) of them saying they were owed payment on invoices that were 30 days past their due date.
Rachel Reeves MP, chair of the Business, Energy and Industrial Strategy Select Committee, said: "Many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability.
"Unless the Government levels the playing field and acts to bring in a tougher regime for poor payment practices, then we choke off the opportunity for SMEs to invest and grow in the future."
Mike Pavitt, who is also partner and head of the corporate restructuring and insolvency group at solicitors Paris Smith LLP, added: "There has been a great deal of effort in recent years to improve business practice around paying suppliers on time, and some progress has been made, but R3 Southern members are still working every single day on business insolvencies where late payment has been a key contributory factor.
"Advances in technology mean that there is no legitimate reason why straightforward invoices can't be paid within the allotted time period, if not immediately on receipt, but the stubbornly high proportion of business insolvency cases where late payment is a central issue clearly shows that this is simply not happening often enough.
"When a company is not paid in advance for goods or services, it essentially acts as a lender for its clients, but it does not have the protection that a secured lender receives, and can set itself up for cashflow problems if payments don't materialise as expected.
"This puts unnecessary strain on the finances of businesses, and can stop them investing in new services, taking on new commercial opportunities, or even having enough cash in the bank to cover their day-to-day costs, which can threaten their very viability."
The Prompt Payment Code commits signatories to paying suppliers within the agreed terms of their contracts, providing them with clear guidance on payment procedures, and encouraging them to adopt the code throughout their own supply chains.
Mike Pavitt continued: "The Federation of Small Businesses and other business bodies have long called for greater adherence to the Prompt Payment Code, which would in turn help to promote a virtuous circle of businesses behaving in an ethical way towards each other.
"This sort of progress could only benefit both the participating businesses and the wider economy, and we hope that the Select Committee's report acts as a catalyst towards further progress in this crucial area.
"Business owners need to ensure they are on top of their invoice ledger and are tackling late payment issues as soon as they start to become apparent, as the 'domino effect' of the failure of one firm impacting on its suppliers is very well documented.
"If problems linked to late payment or any other cashflow issue arise, then the sooner that owner/managers look for expert advice on what they can do to resolve them, the more options they will have for finding the best possible outcome.
“Legislators have been talking about the key importance of tackling late payment of commercial debt for at least as long as I have been involved with the insolvency industry. Legislation which I saw being generated in Brussels 20 years ago when I was working there has yet to provide an effective deterrent; it needs the additional support of trade bodies and contracting parties alike being prepared to promote best practice and to condemn the offenders amongst their industries.”
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