Postal strike adds to payment hell for small businesses

The economy is clawing its way up from the bottom of the slump but the problems faced by small businesses are far from over.

Cash is king at any stage of the business cycle, but three factors are combining to make generating it and keeping it even more difficult than normal, especially for smaller independent importers and stockists already trading on the brink of collapse.

The first is the postal dispute, which has so far delayed at least 20 million letters in London alone. Many of them contain the payment cheques that small enterprises need to survive.

Nobody has yet quantified the cost of this year’s strikes but the London Chamber of Commerce calculated that similar action in 2007 hit businesses to the tune of £300m and it says the impact this year is already worse, even before the result of yesterday’s national strike ballot. The prospect of no deliveries in the run up to Christmas is filling many companies with apprehension.

One wholesaler told the drinks business: “Normally we bank cheques every day, but we have been getting only two post deliveries a week; a significant number of payments are being delayed. Until a cheque clears we cannot risk delivering to those small bars and restaurants already being pro forma invoiced. Yet without stock they will fail.”

The upshot is that some customers are delivering payments personally or by courier while others are being encouraged to switch to paying via electronic banking, further hastening the demise of the cheque, which banks hope to phase out in a couple of years’ time. Electronic transfer incurs extra costs that neither suppliers nor their customers wish to bear.

The position is exacerbated by banks restricting credit in the wake of the financial crisis. Small enterprises are finding it difficult to renew or extend loan facilities, and even those sufficiently sound to be offered funds face penal terms and rates of interest sometimes more than double what they were paying previously. That further erodes their profitability. This position will not alter quickly and then only when the economy has picked up significantly and credit lines are more freely available.

This vicious circle is being drawn tighter, however, by large companies protecting their own cash flows, lengthening the periods they take to pay.

Some are accused of taking 120 days – and in extreme cases 150 days – to pay suppliers, again adding to trading difficulties.

In 2000 the EU introduced a Late Payments Directive in an attempt to force larger companies to pay on time. It would seem that had little effect because on the EU’s own figures a staggering €1.1 trillion is owed to small and medium sized enterprises in late payments.

So now Brussels is having a second go via the Small Businesses Act, which has been wending its way through the legislative process since April. It targets the public sector, which will be forced to pay interest and the cost of recovering late payments, but Eurocrats hope that private sector offenders will adopt more co-operative practices in its wake.

Nobody is holding their breath and if the postal dispute continues it will be too late for many small businesses. They will have failed already.

Finance on Friday, 09.10.2009