It seems that all recent campaigns and attempts to get big businesses to pay their bills on time have failed and an outrageous figure of over £30 billion is owed to small businesses, meaning that they are providing funding to bigger businesses - that is just plain wrong!
The Business Secretary, Vince Cable, seems to think that the solution is to impose fines on businesses that fail to pay their suppliers on time, although that does rather seem like closing the stable door after the horse has bolted and provides little help to the cash flow of the small business with the outstanding and unpaid debt.
The problem seems to be that business culture has developed into one of accepting that 30 and 60 day credit terms are normal; and that has to change. We have moved far away from the days when it was commonplace for a sign to be hanging behind a shop counter with the words “please do not ask for credit as refusal often offends”. The time has come for small businesses to push back; they cannot afford to bank roll the cash flow of big businesses nor can they afford the overhead of a credit control function. And why should they?
There seems to be a fear that if credit is not offered then a sale will not be made to a customer, but is that fear really valid? Surely a customer worth having is one that buys a product or service from you and pays for it to the agreed payment terms. If they don’t pay on time then is that business you should really be chasing?
Thinking outside the box
I run a business in a very traditional industry – accountancy. The norm is very much that the work is done and the invoice raised with the client paying some time in the future. The result is what is termed “lock up”; a large 'debtors and work in progress' balance. When I started my business six years ago lock up was something that I was determined to eliminate in my business model and I did exactly that with clients paying monthly fees. The result is that as we prepare and submit their annual accounts and tax returns the fees have already been paid. They're happy as the accountancy cost is spread throughout the year and we’re happy as we’ve been paid for the work done and do not need to worry about debtors and bad debts. In fact in the six years that we’ve been operating we’ve had only a handful of bad debtors out of nearly 2,000 clients; not a bad result given the recessional times we’ve just experienced.
Accountancy is an industry that changes very slowly but if the elimination of credit can happen here then why can’t it happen in every industry?
Let's go Escrow
I recently came across an innovative solution to small business payment processing offered by People Per Hour (PPH) who “have a community of talent available to work, online, at the click of a button”. Simply put the web site provides a resource for buyer to meet sellers and transact. Once a sale is agreed a proposal is created and, if the buyer accepts it, payment is made with the amount being put into Escrow meaning that the money is held by a third-party, PPH in this case, on behalf of transacting parties. The funds are released to the seller once the sale has been completed, an invoice raised and the buyer agreeing that the work has been done. Funds can also be released if an invoice is overdue or as an outcome of a dispute resolution.
So all round it seems a rather good solution for a small businesses to ensure that they will be paid for the work that they’ve done as well as providing the buyer with an element of protection for shoddy workmanship or other disputes.
Vince Cable’s Business Bank
It seems obvious to me that the solution to businesses not paying bills on time is for an easy and free to use system of Escrow to be available to ALL small businesses in this country via Vince Cable’s new Business Bank. Rather than spend his time proposing a system of fines I’d like a call to action for him and the Government to really support small businesses in this country and make it compulsory for all sales to be paid on or before delivery or for the sale to be transacted via the Escrow system ensuring protection for both the buyer and the seller.
What objections could possibility be raised to such a common sense and practical solution?