How some big businesses prey on SMEs (and what you can do about it)

24/10/2017

Winning a contract with a large business can be an incredibly exciting time for small and medium-sized businesses. But unfortunately, some larger companies use their position to take advantage of smaller businesses which can present some challenges.

For instance, results from the latest Zurich SME Risk Index revealed that larger businesses are responsible for the majority of late payments made to SMEs.

Small business owners reported that companies bigger than their own are responsible for more than half (53%) of the total late payments they would typically receive.

The survey also revealed that almost half of those subject to late payments are forced to wait up to three months to get paid, while a considerable number are typically having to wait up to six months for payment.

Almost two-thirds of SMEs experience typical delays of more than one month on payments which are already more than 30 days overdue.

Supply-chain bullying

Late payment isn’t the only challenge SMEs face when trading with larger businesses.

Research from the Federation of Small Businesses (FSB) revealed that one in five small businesses have been victim to supply-chain bullying.

Aside from late payment, other common poor payment practices that small businesses face include:

Pay to stay: Where businesses demand fees from suppliers to continue doing business with them.

Pay you later: Where businesses insist on excessively large payment terms despite an EU directive requiring all businesses to pay their suppliers within 60 days.

One for you, one for us: Where businesses reward themselves discounts for prompt payment.

Balance sheet bonuses: Where businesses effectively change the terms of the contract signed with the supplier after a contract has been agreed using methods such as threats of de-listing, withholding payment, marketing contributions and previously un-agreed discounts.

In the spotlight

Debenhams is the latest big business to be hit by supply-chain bullying claims. According to the Daily Telegraph, the retailer asked for several deductions from one of its suppliers including a 16.7% discount if it paid the small business within 90 days – double the industry average.

The report also claims that the company asked for a discount for every item that it had to scan, and a charge for goods deliveries.

Debenhams denied the accusations. A spokesperson said: “Debenhams has not changed its terms of business with its suppliers. We have a large number of commercially negotiated discounts but these are separate to discussions on payment terms. The two will of course ultimately be contained in any supplier agreement but are not linked or traded off against each other.

“It would be very misleading to make general inferences from any one agreement with a single supplier but it is categorically not Debenhams’ policy to ask for discounts in exchange for payment terms of 90 days. Our average payment days are 60 days. We are proud of our supplier relationships and aim to follow best practice in dealings with them.”

But it is not the only large company to be publicly criticised and it is unlikely to be the last.

Premier Foods was in the spotlight for its now scrapped pay-to-stay scheme, where the food company demanded fees from suppliers to continue doing business with them.

Supermarkets have also been harshly criticised for their poor payment practices, with ASDA facing particular uproar after imposing 90-day supplier terms.  

So what’s the solution?

The government has recently appointed Paul Uppal as Small Business Commissioner. He will be responsible for championing small businesses by supporting them on issues such as resolving payment disputes and attempting to curb supply-chain bullying.

He said: “Running your own business can be a very lonely experience and my priority will be ensuring small firms feel supported as well as helping to create an overall impression that business isn’t necessarily cut throat.

“In fact, successful businesses are built on integrity, entrepreneurial spirit and trusting relationships and I want to highlight that Britain can be the best place in the world for new entrepreneurs to establish and grow their own businesses.”

Earlier this year the Government also introduced new payment reporting regulations, where large businesses are required to report on their payment practices in a bid to encourage them to clean up their act. It is not yet clear what impact this has had on payment practices.

Whilst these government initiatives are welcome news for SMEs, it is still vital for businesses to take steps to protect themselves from supply-chain bullying.

What you can do

Credit check all customers

Always perform credit checks on all businesses, regardless of size, before you offer credit terms.

And by utilising methods such as the payment reporting mentioned above you can have a better idea of a company’s payment practices.

Understandably, many small businesses feel as though they cannot refuse orders from large businesses due to the value of the contract, and the prestige of being associated with such a big brand.

But, ask yourself how your cash flow will cope with credit terms of 90 or 120 days, plus late payment delays.

Spread your customer base

If you go ahead with a large order, it is wise to try and spread your customer base as widely as possible.

This will mitigate the risk of over-reliance on one single customer for your income and will allow you the freedom to say no if a customer insists on inflicting terms that would be damaging to your business.

Set out payment terms before committing to orders

Also, you should always set out payment terms before committing to orders. When dealing with a large company this can be daunting.

But, outlining your payment terms at the start of any supplier/retailer relationship will ensure everyone is aware of the payment conditions required. No excuses!

Analyse your credit control performance

It is also important that you take the time to analyse your credit control performance.

If you are repeatedly falling victim to late payment there may be changes you can make to your process to improve your results.

Our collection of credit control tips offers various ways to improve your procedures.

Consider seeking help

If you are struggling to keep on top of your credit management it could be worth exploring the benefits of outsourcing your credit control.

By handing the job over to the experts you can regain the time and resource to focus on your business with peace of mind that your credit control is in safe hands.

And, with extensive experience dealing with large businesses, an outsourced provider will know exactly what to do when they exceed agreed payment terms.  To see how we could help please take a look at our brochure.

Have you been victim to poor payment practices from a business larger than your own? What did you do? Let us know your experiences in the comments below.