Small Business, Enterpise and Employment Bill

Written evidence submitted by Stephen Beales (SB 47)

I am Stephen Beales, latterly chief executive of an SME in the construction industry for some 16 years during which the business grew from under £3m to over £20m.

Summary

This note covers:

· Adverse impact of current payment practices on SME growth.

· Inability of SMEs in construction to obtain invoice financing.

· Confirmation that payment In the part of the costnstruction industry in which I work takes about 80 days.

· The need to address both the culture of clients and that of the supply chain and the effort that will be necessary to make any headway with a voluntary approach to payment improvement.

· The benefit of enabling industry organisations to present grossly unfair payment practices to an authority other than the courts, to get such practices banned as requested in the EU payment Directive.

· A suggestion that the Bill should include enabling powers to make directors accountable for their business's payment practices, and thosE that fall short to be subject to penalties through Companies House. Ultimately the directors control the culture.

Submission

1. I have read the debate on the late payment issues of the bill on 16 October, and offer a few personal thoughts in case they might be helpful.

2. I point to the financial growth above in the context of the discussion of invoice financing. Due to the long run nature of construction contracts and the disputatious culture of the industry, invoice discounting was never available. Even had it been available the costs of such finance were not attractive and it appeared at the time I investigated it to be a strategy of last resort if it were available.

3. I can confirm that there are issues in the construction industry. It takes members or the part of that industry in which I work, on average, about 80 days to get paid. Some main contractors do not pay until after 90 days knowing that we do not want to prejudice the business relationship. I sit on the board of our industry association and I know that the problem extends to large firms too.

4. Payments within the supply chain are not the only problem. Some types of clients order work through shell companies that simply do not have the funds in place to pay for what they order. As a result payments to main contractors can be delayed and such delay gets passed down the chain. On the other hand I know also some clients are very keen to support improvement in the payment processes of the industry because they want to employ fully functioning and the most effective supply chains. Both clients and their suppliers are targets for messages about forming the right culture.

5. I applaud the observation that it is culture that needs to be changed. The construction industry is being asked to work more collaboratively to better serve the community at large. That requires trust and it can not exist where underlying distrust is fuelled by reluctance to pay in a reasonable time. A new prompt payment code has been produced as part of voluntary strategy but having no teeth it appears to be a repetition of an unsuccessful strategy that has been tried and failed. How this can succeed is not clear. Some companies survive and prosper by taking credit from their suppliers. Such voluntary action will not inspire everyone. A huge effort will be needed to make a significant impact. Who do you anticipate will provide that effort?

6. What was not mentioned in the debate was the identification of corporate behaviours that are grossly unfair and should be declared illegal under the EU Payments Directive. In the UK there appears to be no forum for identification of such issues other than the courts. No trade association or individual company is likely to be able to afford to test whether behaviours are unfair in that forum. It would be a great step forward if the Bill included powers to create an administrative approach that would allow such behaviours to be examined in an affordable manner. By drawing attention to practices that are unacceptable cultural change could be accelerated.

7. The opportunity exists now for you to both provide for the voluntary approach and equip the government with the powers needed for the alternative if, as I suspect, it will be needed later. I would therefore suggest empowering at this stage the ability to make if necessary

1. regulations relating to directors being made more stringent at Companies House to see that directors who continue to avoid paying in reasonable time are struck off (because it is the directors who set the culture) and

2. regulations to define how a reasonable time for payment should be determined, including the option of simply insisting that everyone gets paid within 30 days unless there are really good reasons why not.

If nothing else such background powers would focus the minds of those who are least willing to listen to the voluntary approach.

8. Were that 30 day payment regime to exist already, the business I was running would overnight be financed to double or more, as the capital already contained in the business could work for that business rather than fund those of its customers. I appreciate that some other businesses would be looking for finance, but as many of them are larger their access to equity and bank finance is probably a bit easier than it it is for an SME.

Prepared 29th October 2014