- Central Government has made monumental effort to pay on time but that cash not being passed on
- Research by Aldermore shows time taken to pay bills by major outsourcers is on the rise
Major public sector outsourcers should be quicker to pass on payments by the Government to small businesses says Aldermore, the new British bank.
Aldermore says this could substantially help the cashflow of hundreds of small businesses who depend on public sector work.
In order to help small and medium sized businesses the vast majority of payments by central Government departments to major contractors are now within just five days of those departments receiving their invoice. However, those major contractors do not have to pass that money onto smaller companies that act as their subcontractors for 30 days.
Five day payment of invoices by Government departments was introduced as a measure to help SMEs survive the downturn.
The Department for Business Innovation & Skills, for example, pays over 95% of its invoices in five days or less.
Says Phillip Monks, CEO, of Aldermore: "Government departments are doing great work in paying their bills within record times. The problem is that money often gets held by the big contractors for as long as possible before they pay their suppliers - the SMEs that do the subcontracting work."
"That means a very positive measure by the Government to help small businesses is not working as well as it could."
"If the Government pays big billion pound outsourcers in five days couldn't those outsourcers start paying their suppliers in a similar period? They have the sophisticated systems to do that."
"With less public sector work around getting early payment is especially important."
Although major contractors are requested, under their contract, to pay subcontractors in less than 30 days it is understood that they are not under an obligation to report back on their performance in paying smaller suppliers.
Some Government departments recommend that where an SME subcontractor feels it is having its request to be paid in 30 days or less for Central Government work ignored then they should raise the problem with the Government department concerned.
Research shows time taken to pay bills by major outsourcers is on the rise
Research by Aldermore shows that the payment days for major Government outsourcers to all their suppliers (for both public sector and private sector work) has continued to rise from an average of 39.8 in 2009 to 40.4 in 2010.*
Ian Wilkins, Group Managing Director, Commercial Finance at Aldermore says the increasing time taken for SMEs to get their bills settled is a feature across much of the economy.
Says Ian Wilkins: "Payments direct from Central Government are one of the few bright spots. In the private sector the story has been for big companies to continue to delay payments to smaller companies. Our clients tell us that local government is also taking longer to pay bills."
"Unfortunately it is often the SMEs with the least negotiating power that are asked to wait for their payment the longest. That is why we are seeing a bigger demand for invoice finance. It is a simple solution and frees up all that cash that is tied up in unpaid bills."
Invoice finance providers will buy the value of a business' outstanding sales ledger for a fee, often within 24 hours, rather than waiting 30, 60, 90 days or longer for payment on a product they have already delivered.
The Asset Based Finance Association's figures show that in the year to the end of December 2010 the value of outstanding invoice finance extended to businesses by its members increased by 9% to £12.6 billion (up from £11.6 billion at the end December 2009).
*Basket of 10 major Government outsourcers representing £28.1billion in turnover (source: company accounts).
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