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Scotland’s SMEs Hit Hard By Payment Delays

Small to mid-sized enterprises across the U.K. continue to feel the pressure of late payments. In Scotland, businesses serving the public construction sector are particularly vulnerable. According to research from industry body Specialist Engineering Contractors’ (SEC) Group Scotland, public bodies are withholding £120 million (nearly $178 million) in payments owed to construction firms, the majority of which are SMEs.

The results of the SEC’s research reveal 97 percent of public bodies surveyed retained some amount of cash from suppliers. More than half use cash retentions for general day-to-day working capital. The practice of using debt owed to contractors as capital is troubling — and a practice the SEC believes places many small firms at risk for insolvency. “Authorities are borrowing, free of charge, cash from firms in the industry which generally do not have easy or inexpensive access to finance,” the SEC writes in the report. Following the global financial crisis, banks continue to have strict lending standards, leaving many SMEs without a way to cover the shortfall caused by late payments.

Despite the passage of the Late Payments of Commercial Debts Regulations of 2013, which require public bodies to remit payments within 30 days of receiving an invoice, it is difficult to track compliance. Ninety-seven percent of the U.K. businesses surveyed by the SEC claimed to pay all of their contracts within the mandated 30-day period, although it is unclear how businesses are tracking and monitoring payments. Nearly three-quarters (72 percent) of public bodies and almost two-thirds (64 percent) of universities make no attempt to monitor supply chain payments.

Newell McGuiness, managing director of SEC member company Select, called the report “depressing,” telling the BBC, “It suggests that while organizations which depend on money from the public purse would appear on the surface to be backing moves against late payment, the reality is somewhat different.”

The SEC report includes several recommendations to improve the payment process across the supply chain. Some are as simple as clearly defining the start and end of the 30-day payment window. Others require more oversight. The organization has called for the expansion of the use of project bank accounts (PBAs), dedicated accounts from which a public body can make payments directly and simultaneously to contractors and subcontractors, improving cash flow through the supply chain. PBAs are currently in use by less than 10 percent of respondents to the SEC survey. The group has also called for the creation of a public procurement ombudsman. Modeled on a similar program in Canada, the position would promote best practices as well as challenge those who do not comply with current and future regulations.

Over the past several years, various policies have been introduced across the U.K. to begin to eliminate the plague of late payments paralyzing small businesses and penalizing those who do not comply. To date, business owners continue to doubt the efficacy of programs including the Late Payments of Commercial Debts Regulations and the U.K.’s Prompt Payment Code, and continue to complain of late payments. Pressure from suppliers and government has created change. Recently, beverage giant Diageo reversed plans to extend payment terms after vocal backlash from suppliers.

Finding ways to fix the issue of late payments in Scotland and across the U.K. is essential to support growth and innovation spurred by small business.

“There is an expectation in Scotland that construction SMEs will invest in skills and training and smart technologies with the efficiencies created directly benefiting the public sector,” Eddie Myles, chairman of SEC Group Scotland, said at an event announcing the survey’s findings at Scottish Parliament. “But this is not achievable unless robust measures are adopted now to improve cash flow all the way through the supply chain.”

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