East Anglia: SMEs suffer as payment terms are stretched

SMALL firms are increasingly fearful of being placed under a cashflow squeeze by some of their larger customers amid claims the giants are adding new contract terms to delay paying their bills, according to anecdotal evidence among some East Anglia-based businesses.

Many smaller firms are facing increasing pressures at the hands of their larger business customers following the imposition of changes from 30 days to 60-day payments.

At the more extreme end some large businesses have said they would not pay for 90 days, and in one case a company wanted to put a 120-day payment term in a contract.

A number of smaller East Anglian businesses say household names have told suppliers that they are extending their terms of payment. Many are fearful of publicly speaking out about the issue, or negotiating, because they do not want to lose vital contracts to their business.

The Federation of Small Businesses (FSB) says one Suffolk business had a large local company threatening to extend its payment terms from 30 to 120 days, which they rejected and would have had to withdraw from site. They had to compromise on the agreement to retain the business last year, but will be going full out to tender this year with a “national contractor” who will provide over discounted prices for pirate parts and a non local business support team.

One firm, East Anglia-based services company May Gurney, last month advised some suppliers that it would be amending its payment terms to 60 days for all invoices received after September 1. Procurement manager Paul Gurney told the suppliers that as a growing business it had to manage its cashflow “sensibly” and was amending its payment terms to what it believed was industry standard.

In a statement, May Gurney said the changes only applied to companies which supply it with material such as aggregates which are used in highways maintenance and it was mainly larger organisations which were affected by the changes.

It added: “Any well-run business pays particular attention to its cashflow management and by making this change May Gurney will be matching the terms offered by its competitors.”

One businesswoman, who did not want to be named, said big companies were imposing rigorous contracts with much longer payment terms.

She said: “It seems to be a case of ‘these are the terms, take it or leave it’,” she said. “In the main we would expect 30 days. We could not leave paying our suppliers for three months. People could go out of business in that time.”

Chris Edney, of Readability in Haverhill, said extended payment terms was not a problem that was badly affecting his business, which makes adhesive labels, including ones which are used as box end labels with bar code.

However, in the last few weeks, two of its major customers had imposed extended terms of 90 days end of month, he said. But he had a positive experience of one customer who linked with Lloyds TSB Commercial Finance to offer invoice discounting facilities.

“There is a cost but it appears reasonable,” he said. “They were very pro-active in offering this help.”

But he felt a small business which only had a small number of accounts, as opposed to his firm’s spread of about 300, could well be feeling the pinch.

“I think you have to perhaps think twice before entering into these negotiations and dealing with major corporations,” he said. But there was always a lead-in time for changes in payment policy, with warning from the company about what it was planning to do, he said. “I wouldn’t like to say I’m happy about it, because nobody likes extended terms imposed on them,” he added.

An Ipswich businessman, who asked to remain anonymous, said: “In principal, extended payment terms has a significant impact on overheads and cash flow, the lack of funds and cash flow reduces investment in equipment and facilities.

“Many of our long term customers are imposing a minimum of 75 days on payment terms and are awarding themselves a 2.5% settlement discount on the basis payment is received within 75 days,” he said.

Payment from one firm is received within 90 days, while other customers have also moved towards extending their payment terms. Currently, 95% of the company’s business is conducted under these terms of supply, he said.

“A small company such as ours trades on 30 days with our suppliers which is not negotiable, at the present time we are providing an additional 60 days credit free interest to our principal customers at a net loss to our business,” he said.

“At the present time we do not have an overdraft facility with our bankers. We foresee that in due course we may need to draw upon such facilities which will place additional financial burden on the business. To recoup these losses we have to increase our prices to remain a viable business; our business is healthy and thankfully growing, but for how long?

“The benefit of extending payment terms for large companies is focussed on reducing costs and increasing shareholder value, but at the expense of their suppliers who are now struggling.”

Paul Winter, chief executive of Ipswich Building Society, pictured above, and chair of Suffolk Institute of Directors, said bigger businesses need to look at their payment policies.

“At Ipswich Building Society we accept the terms our suppliers are looking for, but in return for prompt payment we look for exceptionally good prices. On average bills are settled in approximately 21 days.

“That being said, the sort of business we are in means cash is flowing in over our branch counters each day so settling promptly is less an issue for us than for a firm which relies on its purchasers for cash.

“In my view. larger organisations need to ask themselves if they would be well served if their payment strategy drives its smaller suppliers out of business. Maybe payment terms should be part of a firm’s Corporate Social Responsibility policy .

“Banks also have an important role in this issue by not putting pressure on large companies to extend payment terms and allowing smaller companies financial flexibility if their customers are taking longer to pay.”