Procurement Intelligence Unit

‘Too little – too late’. That was the response from the majority of commentators when the UK Government, alongside the Institute of Credit Management, unveiled its prompt payment code for suppliers at the tail end of what was, by anyone’s standards, a miserable 2008 for global business.

The aim of the code was to enable suppliers to receive payment for their goods and services at a far quicker rate in order to avoid the kind of cash flow crisis that had crippled many small and medium-sized enterprises since the onset of the credit crunch.

“The code focuses on ensuring firms pay their suppliers on time and do not attempt to change their payment terms retrospectively. This will be essential to help smaller firms maintain cash flow in the months ahead,” said Business Secretary Lord Mandelson.

It was this focus on payment terms that forced the government’s hand – although despite the backing of a number of high profile companies, including the John Lewis Partnership – firms were hardly falling over themselves to sign up.

The move followed a series of announcements concerning the extension of payment terms from a number of high profile companies. Most notable among them was Alliance Boots, which in 2008 shocked its suppliers (not to mention the Federation of Small Businesses (FSB)) when it extended its payment terms to 75 days and revealed plans to begin charging a 2.5% settlement fee.The FSB responded to the company's plans by claiming that delays to Boots' suppliers had reached “outrageous proportions”.

Mr Mandelson, who himself is committed to ensuring that the government pays all its suppliers within 10 days – figures released in March showed that 9 out of 10 were hitting that target – convened a meeting of business leaders back in May, and was clearly buoyed by, what he saw, as a change in attitude.

“The promise by FTSE companies to pay on time is very welcome and will hopefully bring an end to the devastating impact which late payments can have on small business”, he told reporters.

However, The Department for Business Innovation and Skills (BIS) told the Procurement Intelligence Unit that, at present, 245 companies had signed up to the code – hardly an avalanche - and recent figures also suggest that the scheme has done little to speed up payments.

According to figures from the BIS, 60% of small companies that had worked for the public sector in the previous six months had never been paid within 10 days. While the business minister, Ian Pearson, admitted that only a third of local authorities were settling up within the Government’s preferred timescale. Hardly a ringing endorsement.

And while Prompt Payment has undoubtedly made an impact (it’s arguable that the government’s pledge to pay its own suppliers within 10 days will have been far more welcome for those companies working extensively with the public sector), its benefits seem to pale in comparison to the increasing number of firms utilising supply chain finance to free up working capital and ease the pressure on their supply base.

And whereas the primary aim of prompt payment is to ensure that companies don’t extend their payment terms beyond, say, 30 or 45 days, supply chain finance will, as the likes of Nike, Sainbury’s and Royal KPN will testify, enable those same suppliers to be paid within a more shorter timeframe.

Earlier this week the Daily Telegraph reported that Coventry City Council had signed up to Santander’s new supplier finance service, and Ian Armstrong, head of financial supply chain solutions at Santander, said he believed that market conditions will dictate that others will follow.

“There’s a price for the service but for most suppliers it’s cheaper than their current financing,” he said.

Among those companies that have signed up to the prompt payment code include Barclays, Sony and Sky, many more, though, are looking to supply chain finance to facilitate the continued health of suppliers chains that, without the co-operation of buyers and financial organisations across the world, would have struggled to survive the most turbulent economic period since the Great Depression.

All of which suggests that it’s supply chain finance, not prompt payment schemes, that is helping to lift the gloom.