Inside business: Late payers may be called to account

THE ROW generated by Michael Heseltine's remarks apparently endorsing late payment of business bills demonstrates what a contentious issue this is. In the words of one observer, late payment of debts has replaced dissatisfaction with their banks as the number one concern among small- business owners.

Whether Mr Heseltine was merely using a story that he has told many times before to illustrate how he understands the problems of struggling entrepreneurs, or whether he was really condoning the behaviour of larger companies that force smaller suppliers and customers to accept delays in payments is not clear. But he has certainly turned up the heat under an already simmering issue.

Tony Bonner, installed last week as chairman of the Confederation of British Industry's small and medium-sized firms council, was reported as saying delaying payment was "bad news because it creates bad will among suppliers and does not help companies grow".

There are plans for the establishment of a British Standard on late payment - under which firms would have to state and abide by payment terms, while Richard Page, the small-firms minister, is conducting a review of the first two years' operation of voluntary measures for which comments must be received by the end of February. Earlier this month, John Gummer, the Secretary of State for the Environment, introduced a Bill designed to speed up the resolution of contract disputes and encourage prompt payment of bills in the construction industry.

However, there is scepticism about how effective such legislation would be, with one small business adviser saying last week that owner-managers tend to think such a law would lead to them automatically receiving a cheque on the expiry of the payment period. When it is explained to them that it would merely enable them to take the matter to a small claims court, their enthusiasm tends to diminish, he said.

Gauging the seriousness of the issue is difficult because of the lack of reliable and up-to-date data. However, a survey of more than 600 British companies by Bradford University's Management Centre found that 52 per cent of all invoices were paid late. Older figures compiled by credit insurer Trade Indemnity indicate that about half of firms with turnover of less than pounds 1m have overdue invoices, compared with fewer than 2 per cent among enterprises with annual sales of more than pounds 20m.

Ian Peters, head of small business services at National Westminster Bank, is sufficiently worried to be broadly supportive of the idea of the statutory right to interest on late payments.

Mr Page last week said that there was concern that such an approach would put small firms at a further disadvantage because their larger counterparts would simply lengthen their credit terms to compensate. But Mr Peters dismissed this, saying that most small businesses would trade time for certainty. "It's better to know you'll get paid in 50 days rather than hope for 30 days and get it in 60," he added.

There is general agreement that paying late is part of the British business culture, with some suggestion that banks' reluctance to increase credit lines leads firms to fund their businesses by taking longer to pay suppliers - so effectively using them as loan providers. Research out soon is also expected to confirm the widely held view that - for all the talk of large companies exploiting smaller ones - the problem of late payment is at its worst among the small firms.

Moreover, it could be that much of the problem is unintentional. A study by Imperial College's Management School showed that internal management deficiencies, such as poor handling of debt and forecasting, played a role in the failures of 70 per cent of small firms.

Accordingly, there may be less need for legislation and more of a demand for instruction in finance - in particular the roles that such funding methods as factoring and invoice discounting, as well as straightforward debt-chasing, can play.