Small businesses are extremely vulnerable to cash flow problems, and even the slightest slip in payment dates can leave the business unable to pay its suppliers and even staff salaries. In many cases, big suppliers don’t pay their smaller suppliers quickly enough to keep the small businesses running, and as a result the small business finds it simply can’t make ends meet.

This week, Tesco was found to have breached a legally binding code of conduct that’s designed to protect small grocery suppliers against these kinds of cashflow problems. Tesco’s poor payment policy is an example of the ‘pass the invoice’ culture that can and does destroy small businesses.

Tesco found to delay invoice payments

Christine Tacon, the Groceries Code Adjudicator, found that Tesco had “acted unreasonably” when delaying invoice payments to its suppliers. Her investigation lasted more than 18 months, and looked into the way Tesco paid invoices and corrected any mistakes.

The report found that Tesco significantly delayed and in some cases went out of its way to intentionally delay supplier payments by months. Ms Tacon said that Tesco was in the habit of putting its own financial position first and as a result risking the financial position of its suppliers to make its own accounts look stronger.

Since many Tesco suppliers are small businesses, this is cause for concern. The report says there were a number of occasions where Tesco had acted unreasonably when it came to making payment. For example, Tesco owed one supplier a multi-million pound debt, which was caused by its own pricing error. It took the supermarket more than two years to pay back what it owed. In another recent case a supplier had to begin insolvency proceedings against Tesco to secure a payment of just £6000.

For many companies, this would be a death warrant, yet it was found to be part of the culture at Tesco. As a result of this investigation, the supermarket has been told to make significant changes to its processes and treat its suppliers more fairly in future.

Adjudicator Ms Tacon said:

“The length of the delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers concerned me. I was also troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.

Keeping your suppliers in business

Tesco is a good example of a very large company supplied by very small companies. As such, we would argue that it has a moral and legal responsibility to pay to agreed terms and not to use its size or financial position to bully its suppliers for the benefit of its own bottom line.

Small businesses are often unwilling to chase payment from large companies, in case they lose their biggest customers, but in our experience of dealing with grocery and retail sector debts this is a fallacy. Even if it wasn’t, no business irrespective of its size or turnover, need be held to ransom by a larger customer as the law is on your side.

In the UK and across the EU, all invoices must be paid within the agreed time frame and any credit period must not be “grossly unfair” to the supplier. Once this period has passed, a business can claim a fixed fee for late payment, plus interest and debt recovery costs and this applies regardless of whether the client owes £50 or £5 million. Our free app make calculating the late payment costs and interest a breeze and can be downloaded on both the Android and iPhone stores.

If you own a larger business, and you buy products or services from smaller businesses and freelancers, paying on time is not optional – it is compulsory. In our opinion, larger businesses should seriously examine the culture of pushing invoices over their due date to improve the way their accounts look. Not only is it unethical, but if your company incurs debt collection charges from us it will become much less financially attractive.

If you run a small business, you should know that you are perfectly entitled to chase a big business for amounts overdue, even if the amount is relatively small. It’s best to be proactive and firm when dealing with your accounts, so all of your clients, irrespective of their size, know you aren’t a soft touch when the time comes to get paid.

If you do have a customer that struggles with the idea of prompt payment then why not contact us today to find out how we can help you safeguard your cashflow.

Image Banksy's "In Tesco we Trust" by flickr user David, Bergin, Emmett and Elliott cropped by us. Shared under the Creative Commons 2.0 license.