MPs support the idea of fines for businesses that repeatedly fail to pay suppliers within 30 days, but is this realistic, or even wanted, for fashion retailers and suppliers in the current trading climate? Drapers finds out
The government initiative to encourage larger businesses to pay suppliers quickly and on time was first introduced in 2012. Since then, the voluntary has been adopted by a range of large fashion retailers, including Next, Marks & Spencer and Superdry, which have agreed to pay suppliers within a maximum of 60 days.
A proposal to make the code mandatory for large businesses of more than 250 employees is gathering support among MPs. In a survey of 100 MPs published last week, three-quarters backed the idea, along with recommendations to introduce fines for late payers to reduce the maximum payment terms to a hard 30-day limit.
Almost a quarter of UK insolvencies are caused by late payment issues
Phil Hall, head of public affairs and public policy, Association of Accounting Technicians
Late payments undoubtedly have a negative impact on suppliers.
Phil Hall, head of public affairs and public policy at the Association of Accounting Technicians (AAT), which commissioned the survey, says: “Almost a quarter of UK insolvencies, including retail insolvencies, are caused by late payment issues.”
Even when suppliers can absorb late payments, the loss of income and impact on cashflow can stymie growth, and limit their ability to invest in the business or to meet their own supply chain and payroll obligations.
Retailers acknowledge the moral argument for paying suppliers on time.
“From an ethical perspective paying promptly is the right thing to do,” says the CEO of one high street womenswear chain. “But should it be legislated? In an ideal world, payments would all work in a prompt and efficient way but it’s an idealistic view of how businesses work.”
The CEO of a multibrand retailer agrees: “It’s morally right that large retailers should pay on time, but you have to recognise there are administration and process issues on both sides. Goods may not arrive in the warehouse at the right time, or there could be quality issues that are under discussion.”
Fines rarely achieve the intended result or are enforceable in our industry
Tristan Haddow, CEO of nightwear and swimwear supplier Haddow
Setting up a payments system that is efficient enough to cope with additional legislation would be a further burden on retailers when sales are challenging.
One retail chief executive comments: “In the current trading environment, it’s unrealistic of the government to expect retailers to invest several million pounds in a better administration system when there is an overall lack of clarity in the business landscape.” He adds that help around business rates would be of more benefit, and provide a clearer context for retailer and supplier negotiations overall.
Suppliers tell Drapers they are unconvinced that fines are the right answer.
Tristan Haddow, CEO of nightwear and swimwear supplier Haddow, says: “From experience, fines are rarely the way to solve such matters, and rarely achieve the intended result or are enforceable in our industry.”
Enforcement for the new legislation would fall under the UK Small Business Commissioner but the proposal raises several questions.
Stephen Sidkin, partner at law firm Fox Williams, asks whether a legislated late-payments mechanism would genuinely benefit small businesses with their cashflow problems: “Would the timing and any payments received be too late to help? And how would suppliers remain anonymous? For the system to work fairly, the code board would need to seek evidence from all relevant parties.” Anonymity could be a sticking point for suppliers.
A further obstacle is fixed 30-day payment terms.
One supplier believes this could have the opposite-to-intended effect: “A 30-day limit would stifle economic growth across the board rather than serve as a tool for growth. Retail is dependent upon credit. Until we have long, hard conversations with ourselves as an industry, that is not going to change.”
Small business average payment times
The proposed changes to the Prompt Payment Code focuses on the payment practices of large UK businesses. Research into small business payment practices show shorter average payment times.
A survey of 1,000 small business owners (fewer than 50 employees) commissioned by Square at the end of last year found that it takes those in the retail, catering and leisure sector an average of 10 days to pay suppliers: half (50%) pay suppliers immediately, while 41% pay within 30 days, and 7% take between 31 and 60 days to pay.
The research revealed that a quarter of small business owners in those sectors have themselves experienced late payment. The knock-on effect has meant 37% have not been able to replenish stock, 14% have been unable to pay their own suppliers and 13% have fallen behind on payments to landlords and staff.
Another believes it would put several high street businesses immediately out of business: “We’d love to be paid within 30 days, but it’s not realistic as the market is. Some retailers wouldn’t be able to finance their businesses.”
One denim supplier says it phased out working with some retailers when terms were extended to 120 days: “Once all documents were submitted, this meant it was more like 140 days. Now, we do not consider anyone who is over 90 days and most of our accounts are 30 to 60 days. I think anyone who extends their terms beyond 90 days means that their business is showing signs of distress.
An alternative to system of fines could be a ‘three strikes and you’re out’ approach
Stephen Sidkin, partner at law firm Fox Williams
A by Lloyds Bank Commercial Banking and the UK’s Small Business Commissioner, shows large UK retailers take an average of 38 days to pay suppliers. This is on par with the all-sector average of 37 days.
However, a third (32%) of retail invoices with 30-day payment terms are paid later than agreed, while 37% of invoices are paid within 60 days. Around 15% of invoices are paid after 60 days.
Both retailers and suppliers agree that retailers should stick within the terms negotiated, rather than working to an arbitrary 30-day limit set in law. This is where fines could make more sense.
Or, as Sidkin suggests: “An alternative to system of fines could be a ‘three strikes and you’re out’ approach to membership of the Prompt Payment Code.” Whether this would still have the necessary teeth to change the processes and policies of offending businesses remains questionable.
Improving the relationship between suppliers and retailers would be more beneficial than fines, argues Haddow: “Retailers should work closer with suppliers to understand their individual circumstance, rather the blanket enforcement of terms that we see at the moment.
“In other industries where there is an imbalance of power between parties, there are ombudsmen who are able to independently adjudicate on situations such as payments or contracts. This would be a welcome addition to our industry,” he added.
A more pressing issue for suppliers is retrospective discounting when changes are made to agreements and payment terms on existing orders.
“This should be made illegal,” said one supplier. “The government’s focus is misplaced.”
The Drapers Verdict
When payment terms are changed with little notice, it is usually a sign of the financial pressure a retailer is facing. Suppliers are often the easiest source of improving a margin or cash position, but suppliers note this line of action is usually a short-term strategy and rarely provides retailers with longer term benefits. Instead it creates wariness among suppliers that is potentially damaging in the longer term.
While enforcing legislation on late payments maybe unrealistic and too costly in today’s tough trading environment, a good relationship built on trust between retailers and suppliers is vital and must be upheld to secure the future of the industry.
- What’s your view?