The Unintended Consequences of Legislating Late Payments

The UK Government has set up a Prompt Payment Advisory Board to help businesses tackle late payment. The board will focus its efforts to promote awareness of the Prompt Payment Code and monitor how companies are adhering to it. The code sets out principles for businesses to follow when dealing with and paying their suppliers. More than 1,700 businesses and public authorities have so far committed to these principles.

I think it is really admirable to help expedite payment to small business. And there are certainly many initiatives corporations can take to enable their suppliers to get payment immediately upon invoice approval or even without an invoice. Large direct suppliers can use supply chain finance programs. Smaller suppliers selling indirect services can use dynamic discounting or pcard programs. Many companies help suppliers with pre-shipment on an as needed basis.

But before we go too far around legislating some standard number for payment, we need to look at some of the potential negative consequences of this potential law?

  • First and foremost, large corporations can just stop doing business with you. Remember, if you are not a strategic supplier, than you don’t have the leverage you may think you have.
  • Number two is come time for renegotiation of the contract, you may find certain terms in your contract change that are not favorable to you.

We know late payments can be a big problem, especially in various sectors like construction or governments. But making it compulsory to pay suppliers between 35 and 45 days may just create other problems.

I believe a better solution is to provide all suppliers with options to get paid early. Yes, some of it may be expensive if evaluated on an APR basis, but it enables the supplier to decide, yes or no. It is a voluntary decision they make. Making something compulsory usually ends up blowing up in people’s faces, and my concern is that it could make it more difficult for some small suppliers to transact.

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First Voice

  1. Robert Kramer:

    Good post David. As you noted, legislating shorter payment terms may create other problems. I think we need to keep in mind that payment terms are only a single component of the buyer-supplier commercial relationship. It would be naïve to think buyers with leverage will simply absorb the negative economics. They will offset any losses in other areas which may be more painful for suppliers (e.g. price, inventory, etc.). At least accounts receivable can be financed relatively easily and there are early payment solutions available as you suggest.

    Also, there is an important difference between long payment terms and late payment. Long payment terms can be planned for, financed and managed. Late payments are much more problematic because it is much more difficult to manage them and, after all, they are a breach of contractual terms. I think these two separate issues are too often commingled.

    Bob Kramer
    PrimeRevenue, Inc.

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