Winning a major deal with a large organisation can be a landmark moment for a small business. Securing that first big contract is often what catapults an idea, or one-man band, into a living, breathing company. Yet, that big contract can be a threat. Too often, the SME has to bend over backwards in adhering to the strict payment and procurement terms of an enterprise. This, unsurprisingly, can impact profitability, morale and the ability to take on additional clients and grow the business.
One of the major areas in which this situation has become apparent is late payments to small suppliers. Cash flow is the biggest financial challenge SMEs face; they depend on a steady supply of capital to cover payroll, expenses and material costs. So when enterprises, with comparatively few cash flow issues, turn the screw by insisting on lengthy payment terms, it can lead to capital constraints that shut suppliers down for good.
New year, same problems
2016 hasn’t got off to a great start. Research from the latest Zurich SME Risk Index suggests more than half (53 per cent) of the UK’s small businesses are owed an estimated £255 billion in outstanding payments. Waitrose has made negative headlines already this month regarding how long it takes to pay its large range of UK suppliers. One producer, quoted anonymously in The Times, said: “I am on 45 days [payment terms] with Waitrose and it nearly kills me sometimes.”
Waitrose is under greater pressure after a decision last year by rival Tesco to slash its payment times in an attempt to repair relations with its suppliers who labelled the supermarket giant a bully over claims that it delayed payments and breached industry rules on payments.
Last year, also saw the likes of Heinz, the iconic US food manufacturer, up the length of time it pays British suppliers from 45 days to 97. Elsewhere, multi-national brewer AB InBev – the company behind famous brands such as Budweiser, Stella Artois and Boddingtons – was revealed to be demanding payment terms of a whopping 120 days from the end of the month in which an invoice is issued.
Solving the supplier-buyer conundrum
Suppliers want to be paid early and buyers want to delay it – that’s been the case since the dawn of time. But supply chains work because they’re based on relationships that deliver value to all the parties involved and moves like this stand to erode the trust and the value of being part of that chain.
With an array of tech and financial solutions to late payment issues there’s simply no need for enterprises to adopt such harsh tactics. There are now a host of digital platforms available which can level the playing field between both sides of the supply chain, enabling businesses to collaborate online much more easily. Dynamic discounting, for example, can ensure that both sides of a transaction strike a balance they’re both happy with by rewarding early payment with a discount.
Everyone’s a winner
The good news is that progress is being made. Although Waitrose’s poor payment terms have been exposed, it was revealed alongside the news the firm was to begin a full review of its internal processes to improve such matters. It’s clearly possible - the same supplier quoted in The Times also revealed that Tesco had cut the days it took to pay him from 60 to 14.
The message to enterprises is that everyone benefits by helping to create a fairer economy driven by collaboration. Small businesses will thrive, giving enterprises a greater choice of supplier options, offering better quality and value. In terms of the bigger picture, small business growth creates jobs throughout society, benefitting the economy as a whole.
Christian Lanng, founder & CEO, Tradeshift