The Federation of Small Businesses has criticised bigger companies for (in some cases) taking more than 100 days to pay off their debts – meaning that some smaller companies are running dangerously short of cash. And although most of those affected will probably have a clause in their contracts allowing them to charge interest on the debt, in practice most of them won’t do so, for fear of losing the contract.
The FSB’s outburst seems to have been prompted by Alliance Boots, the pharmacy chain that was taken private last year by executive chairman Stefano Pessina and buyout firm Kohlberg Kravis Roberts. AB has apparently written to all of its suppliers telling them that from April, it has changed its payment terms from 30 days (as it was previously) to 75 days after the end of the month – which could mean invoices go unpaid for over 100 days, if you time it badly.
FSB National chairman John Wright calls this ‘nothing short of outrageous’, and says that big companies are taking advantage of their smaller brethren. ‘At a time when small businesses are finding it difficult to deal with a slowing economy and rising costs, it is shocking that large companies think it is acceptable to use them as an unofficial source of credit,’ he harrumphed.
Unfortunately it’s a bit hard to see what small firms can do. Generally speaking, the contract will be more important to them than it is to their client, so they’re naturally reluctant to do anything that might risk it. So even if they’re perfectly entitled to start charging interest, the chances are that most won’t bother. And the big boys know this perfectly well: ‘Big companies appear to be aware that small businesses are afraid of taking them on over payment terms, and are abusing their power as a result,’ says Wright.
The Alliance Boots move isn’t exactly a shock, to be fair. In fact, this is a standard tactic for private equity firms: by getting the money in faster and taking longer to pay bills they can instantly improve their cash position, boosting the balance sheet and making it easier to service debt charges. This is nothing to do with the credit crunch (they’ve been doing it for years) - but it may get a lot more commonplace as big firms try to run a tighter ship.
However at a time when small businesses are facing slower demand, higher fuel and commodity prices and tightening lending conditions, it might now end up being a fatal blow to many of their suppliers. So let’s hope it doesn’t catch on....