Resisting the squeeze

The credit crunch and general economic gloom are giving some big companies an excuse to squeeze their suppliers. With the Government saying it will pay small firms within 10 days, the UK's small business associations are calling for similar assurances from the private sector - but the chance of a blanket agreement is remote. For now, small firms must protect themselves.

Many smaller suppliers are suffering at the hands of big retailers, but most are afraid to speak out for fear that business will be withdrawn.

One business owner suffering a tightening of terms is Jenny Lees, who runs Herefordshire-based DentaNurse. Founded in 1986, the business supplies a range of innovative dental products for the home, such as a first aid kit for teeth. The business is suffering at the hands of Boots since it was taken over by US private equity firm Kohlberg Kravis Roberts in 2007.

"Boots always had 30-day payment terms and a 2.5% discount for the privilege," she says. "For ten years the relationship worked well until it got taken over by the Americans. They sent suppliers a letter, dated April 1, stating that new terms would now apply, paying in 75 days - and possibly 105 days. And they still took a 2.5% discount!"

She says that despite the fact she had a contract with Boots it was able to change the terms arbitrarily. "When I talked to a lawyer at the Federation of Small Businesses, they pointed out that there was no finishing date on the contract - it was an open and ongoing contract. That meant they could change it." Lees' advice for firms about to trade with large multiples is to check the fine print in this respect and make sure you don't get caught out the same way.

With the building industry one of the first to be hit in a downturn, Christine Hogg's business, Stevenage-based Cams Fire and Security, expected the worst. The firm has been trading since 1984 so anticipated the problems of late payment they are now experiencing. But that hasn't made it any easier. "Many of our customers are in the building industry," she says, "meaning they are increasingly paying late and some, after going into liquidation, aren't paying at all."

Overall, Hogg says the business has stopped expanding and is concentrating on what it's got. And she's no believer in the government's headline-grabbing 'we pay SMEs in 10 days' announcement. "We got a big contract for a Ministry of Defence site," she says. "But the MOD don't pay us direct. It's done through intermediaries. So while they might get paid in 10 days, we still have to wait 90 days."

Kate Cazenove is in the process of forming relationships with large supermarkets. She founded Sip Drinks in May 2007 and in November the flavoured water company managed to secure listings in Boots, Tesco and Sainsbury's. She is under no illusions that the hard work starts here, but she says buyers at supermarkets are misunderstood. "It took me two months to get listed in Tesco," she says, "so it is in their interests to help you stay listed. They don't want to go through that whole procedure all the time and they have been helpful."

She admits that the supermarkets could turn around and change their terms or make additional demands on her business at any time, but she accepts it as their prerogative. But with the relatively tiny amount the large multiples make from her company, they are not in the business of squeezing the life out of it.

Guy Tullberg's approach with his business, The Tracklement Company, is to stick to a 20% rule. His Malmesbury-based sauce firm doesn't allow customers to skim more than 20% from the sale of his products, meaning he's not looking to get into the big multiples.

"Hopefully that means we don't get pushed around," he says. "We spread our wings as wide as we can but not at the expense of the brand. We have manufacturing capacity that could be turned to the bulk market, supplying sandwich makers or ready meal manufacturers. If a customer knows they have more than 20% of your business or they have an inkling it's important to you, they will lean on you."

Another business owner with a less rosy outlook is Suzanne Richmond, CEO of Middlesex-based RD Property Maintenance. The business carries out insurance work following fire or flooding, but also does other refurbishment work and has recently won a prestigious award for its efforts from the Federation of Master Builders. Her problem? The business is owed £100,000.

"It has a massive impact on our cash flow and in terms of paying our suppliers," she says. "And while 50% of our suppliers understand the issues we're facing, the other half are not so understanding." She has had to result to the law to claw back money her business is owed and the net result is the severing of business relationships. "We are being much more selective about the companies we work with," she says. "We are still getting work through the door, but checking their payment track records before we agree to do the work and getting everything in writing."

When it comes to getting invoices paid, she adds: "It's a case of who shouts loudest gets paid first."

It's a situation that simply can't be right, says John Wright, national chairman at the Federation of Small Businesses. "Making small businesses wait 105 days for payment and charging them for the privilege of doing so is nothing short of outrageous. At a time when small businesses are finding it difficult to deal with a slowing economy and rising costs, it is shocking that large companies think it is acceptable to use them as an unofficial source of credit."

Phil McCabe from the Forum of Private Business (FPB) agrees. The FPB maintains a 'hall of shame' in order to identify companies which habitually pay their suppliers late, or which impose sudden and unilateral changes to payment terms.

"Many smaller suppliers are suffering at the hands of big retailers," he says. "However, most are afraid to speak out against the abuse they experience, fearing that this business will be withdrawn in retribution. It is fair to say there is a culture of payment abuse in the UK."

Finally, Stuart Blake is a late payment adviser for the FPB. He says there are several legal prerequisites all small firms should adhere to. "First, have a written contract," he says. "Also, have it in place before you start conducting business, and ensure the contract includes clear payment terms." Ultimately, if a multiple decides to arbitrarily alter the terms of a contract, Blake says all firms have the right to decline and to stop supplying their goods or services.

The FPB's 11-point payment plan

  1. Make your terms clear
  2. Consider credit checking potentially large customers
  3. Make your invoice clear
  4. Invoice on time
  5. Create a system and stick to it
  6. Chase outstanding bills ASAP
  7. Deal with excuses professionally, but promptly
  8. Consider stopping lists
  9. Send seven-day letters warning customers payment has still not been received
  10. Communicate regularly with all your customers
  11. Finally, thank customers who pay on time

Smarta Tax Services - the perfect solution for start-ups or Sole Traders in need of tax and accounting support. Get a personal experience with a dedicated Accountant that will ensure you keep track of day to day operations of your business, and you've completed all areas required to comply with HMRC and Companies House.  Our trusted accountancy software allows transparency and you'll have 24/7 access online, so you can keep track of your business performance.

We use cookies to create the most secure and effective website possible for our customers. Full details can be found here