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How SMEs can avoid Carillion-style payment disasters

The collapse of Carillion has put the issue of SME protection back under the spotlight. The crisis could be catastrophic for the SMEs involved and begs the question, why are SMEs still left so exposed when partnering with larger firms?

Carillion has crumpled with estimated debts of £1.5 billion, leaving thousands of SMEs in its supply chain perilously exposed. It’s encouraging to hear that high-street banks and newer lending facilities, such as the British Business Bank, are working to put in place emergency measures that will give these firms some much-needed breathing space. Nevertheless, these SMEs have been left high and dry by mis-management at a larger client.

Fortunately, collapses akin to that of Carillion are relatively rare. However, it has highlighted the vulnerability of small businesses when they enter such working agreements and also the fact that despite repeated Carillion-style crises, little in the way of protection has ever been put in place.

The connection with the issue of late payment is clear. Obviously Carillion isn’t an example of late payment (more no payment), but with better protection, many of the SMEs involved wouldn’t find themselves in the terrible position they find themselves in now. Similarly, if SMEs were better protected against late payment, a significant amount of which involves larger firms, they wouldn’t find themselves against the wall (and going to wall) when cash doesn’t arrive when it should.

Recent developments offer some hope – the new small business commissioner has been given powers to help small businesses combat late payment, which will include a new late payment complaints service. However, rhetoric is one thing and action another, and there is as yet little evidence that the issue is being effectively addressed. According to the Federation of Small Businesses, a staggering £18 billion in being held up in late payments.

The Federation has gone as far as saying that it’s time to name and shame late payers. The sentiment is perfectly understandable in light the inaction over the matter, but it is still a questionable move, not least as there is the potential to lose business relationships and income. Perhaps the sector has reached a point where there is no viable alternative. Nevertheless, despite the not unreasonable frustration, a less confrontational solution would still be preferable.

This is where alternative finance and in particular invoice finance comes into the picture. Using invoice finance can help secure payment in a timely fashion without threatening business relationships. As such, it could be part of a wider strategy to ensure prompt payment and protect small businesses.

In the wake of the Carillion collapse, it seems clear that SMEs have to be granted more protection when it comes to dealing with working relationships with larger firms, both in terms of securing payment in general and avoiding late payment issues. Without this protection, small businesses are left horribly exposed and this vulnerability can only adversely affect sector performance and growth.

To find out more about A&T Business Associates services, contact Tony on 01903 602211 or tony@atbusinessassociates.co.uk.

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