Right This Wrong

Chuka Umunna writes:

You identified a gap in the market, left your job, risked it all to set up shop and now you run your own business. You work hard, employ a few local people and treat them well. You managed to keep your head above water throughout the most serious economic downturn in a generation and survived. You treasure every customer, many of them the big boys – the larger companies, the big players. This story is repeated up and down the country among Britain's 4.47 million small- and medium-sized enterprises. Yet over 4,000 SMEs failed to make it through the 2008 crash and it was not for want of sales.

Why? Because thousands of them were let down, mostly by big business. SMEs are owed a staggering £24bn by late payers (more than the entire budget of the Department for Transport). It is the large firms that are the worst offenders. According to Bacs, which runs the electronic processing system for financial transactions, a third of SMEs report that large companies aren't paying their bills on time. The average SME is owed £27,000 at any one time and waits 39 days longer than agreed under contract. Consequently 158 million man hours are wasted every year chasing bills. The figures are breathtaking.

In 1998 the Labour government responded to this growing problem by introducing the Late Payment of Commercial Debts (Interest) Act after the previous administration sat on its hands. The act enables firms to charge interest and obtain compensation on overdue payments from customers. If a firm has agreed a credit period with the purchaser of their goods, interest applies on the expiry of the credit period until the invoice is paid; if no credit period is agreed, a default credit period of 30 days applies instead.

Following the 2008 crash, Labour worked alongside business bodies – the Institute of Directors, the British Chambers of Commerce etc – and the Institute of Credit Management to launch and get FTSE100 companies signed up to a new prompt payment code. The code stipulates that suppliers must be paid on time and signatories agree to see that the code is adopted down the supply chain.

In the March 2010 budget, shortly before leaving government, we tightened the existing rules governing payments by the public sector, setting departments the goal of paying 80% of undisputed invoices within five days and requiring them to do so within 10 days. Departments were also compelled to include clauses in contracts with suppliers to ensure contractors pay any subcontractors within 30 days.

But despite this, late payments continue on a grand scale. The Federation of Small Businesses has just published a survey showing that almost three quarters of businesses have been paid late in the last year. The message: SMEs are still, in effect, bankrolling some of their large customers. So the Conservative-led coalition cannot stand by on this issue any longer after more than a year in office – it must build on the last government's legacy and take action.

First, the decision to carry on with Labour's prompt payment code was welcome but they should explore ways to get even more large businesses to sign up to it. Second, government must ensure it improves the monitoring of departments' performance in meeting the five-day payment target – monitoring is currently patchy and the target needs to be properly enforced. Third, through contracts with suppliers to the public sector, ministers should ensure prompt payment is enforced not just between contractors and subcontractors, but all the way down the supply chain.

Finally, the EU has recently got in on the act with the adoption of a new late payment directive that substantially mirrors our current domestic regime but also introduces a minimum fixed amount of compensation for late payment and tightens the time periods for payment. The directive must be transposed into domestic law by March 2013; the Conservative side of the Coalition is not famed for its love of Brussels, but why delay transposing this directive?

The Chartered Institute of Personnel and Development has estimated that 1.6 million jobs will go in the course of this parliament as a result of the government's spending review. As the public sector retrenches and the cuts bite, the private sector is expected to fill the gap. SMEs are responsible for six out of 10 private sector jobs and almost 50% of private sector turnover. A lot is being asked of them. The least we can do to help them is right this wrong and put an end to this scandal.