Prompt payment is crucial for the financial health and stability of businesses, especially small and micro enterprises that form the backbone of local economies. This is particularly important for firms supplying public sector organisations, where the size and complexity of these entities can lead to more intricate procure-to-pay (P2P) processes.
Following her recent webinar on the topic, Libby Daniels, Director of Client Services at Oxygen Finance, examines payment terms within local authority tenders, dissects the mechanisms designed to ensure timely payments, and explains how both public sector buyers and suppliers can achieve a more equitable and efficient procurement process.
The Crucial Role of Prompt Payment: Beyond Financial Stability
Prompt payment is not just a transactional courtesy; it is the lifeblood of businesses, fuelling growth, fostering innovation, and bolstering resilience against economic uncertainties. For small and micro enterprises, which often operate on thin margins, timely payments can mean the difference between sustainability and struggle, between expansion and stagnation. Beyond just financial implications, prompt payment cultivates an environment of trust and transparency between local authorities and suppliers. This fosters stronger relationships, encourages collaboration, and paves the way for a more efficient and mutually beneficial partnership.
The Dire Consequences of Late Payments
Late payments can cripple businesses, forcing them to deplete reserves, delay crucial investments, and even face closure. The Federation of Small Businesses (FSB) reports that late payments led to the closure of over 50,000 small firms last year, with a staggering 62% battling delayed invoices. The time and resources wasted chasing overdue payments could be better utilised for innovation, expansion, and job creation.
The Regulatory Background & Policy Yet to Come
For the Public Sector, there is clear guidance on payment timescales to suppliers in the Prompt Payment Code, and further clarity on the expectations of Public Sector bodies in the Procurement Act 2023 – all pointing in the direction of them setting the bar for other sectors for prompt payment and liquidity in the supply chain.
1. The Prompt Payment Code: A Pledge for Timely Transactions
The Prompt Payment Code is a voluntary yet powerful commitment by businesses to uphold ethical payment practices. For Public and Private entities alike, it sets the standard for prompt payment, urging signatories to adhere to a 30-day payment term, ensuring suppliers receive their dues within a reasonable timeframe.
Key Requirements for signatories of the Code:
- Public Sector Leadership:
Public Sector signatories must lead by example and contract on 30-day payment terms - Transparent Reporting:
These organisations must also report on payments made within 30, 60 and 90 days, to demonstrate their adherence to the standard terms and promoting accountability - Empowered Suppliers:
The Code reiterates that under the Late Payment of Commercial Debts (Interest) Act, suppliers are within their right to claim late payment fees of 8% above the Bank of England base rate, and recover any reasonable costs incurred by recovering the debt. This ensures suppliers are not left out of pocket due to late payments, fostering a culture of timely and fair transactions.
2. The Procurement Act 2023: A Legislative Push for Transparency and Fairness
The Procurement Act 2023 introduces several key provisions designed to strengthen prompt payment practices and create a level playing field for businesses of all sizes.
Key Provisions of the Procurement Act 2023 (PA23) relating to payment and financial stability of the market:
- Payment Compliance Notices: Local authorities must publish their payment performance records, showing the percentage of invoices paid within 30 days. This transparency holds them accountable and encourages adherence to prompt payment standards – and is a step up from the Prompt Payment Code, as the PA23 is legislation, though we are yet to find out the consequences of non-compliance.
- Most Advantageous Tender (MAT): This framework encourages local authorities to prioritise quality, innovation, and social value alongside cost when evaluating tenders, fostering a more holistic and impactful procurement process.
- Early Notification of Procurement Opportunities: amongst a whole host of new notices, Public Sector authorities will have to publish a procurement forward plan, covering 18 months ahead and any events where the value is likely to exceed £2m. This should allow bidders at a far earlier stage to assess the financial viability of projects, and what funding may be required – rather than “bidding now, planning later”.
“Getting money into the hands of smaller businesses earlier reduces uncertainty and increases confidence, which is good for jobs and society.”
Liz Barclay, Small Business Commissioner.
Streamlining the Buyer / Supplier transactions: Early Payment Programmes
In today’s economic landscape, efficient financial management is crucial for both local authorities and businesses. One innovative approach gaining traction is the operation of an early payment programme.
Over 50 local authorities, managing a combined budget of £27 billion, have adopted this strategy. By streamlining processes and reducing transaction costs, these programmes support the local economy and ensure better cash flow for all parties involved.
It’s no surprise that more than 20,000 suppliers are engaging in early payment programmes.
“FastTrack providers significant benefits to our suppliers with hundreds of firms receiving payments quickly and efficiently… getting paid fast can be a lifeline.”
Councillor Paul Johnson, Flintshire’s Cabinet Member for Finance, Social Value, and Procurement.
Enhancing Cash Flow and Reducing Costs
Early payment programmes provide a valuable lifeline for businesses, especially small and micro enterprises that might struggle with cash flow fluctuations. These programmes allow suppliers to receive payments earlier than the standard term of 30 days and target payment just 10 days after invoice receipt or earlier, injecting much-needed liquidity into their operations.
How Does Early Payment Work?
Nothing changes for the suppliers – invoices are submitted as normal to the Accounts Payable team at the Council. The Council will prioritise the approval and payment of the supplier’s invoice, and as quickly as possible make the payment.
“We have been very happy with the Priority Account Service. The process runs smoothly, and it was easy and quick to sign up. In our experience, invoices are typically paid within 7 days, much faster than the standard terms, which is very positive for our business.
Junaid Amin, Director, Freerun Private Services.
For an authority, having an organisation like Oxygen supporting the implementation of an early payment programme can make the whole process a lot easier. It is easily contracted through the NEPO Framework NEPO512, and Oxygen will support with implementing the technology and process changes required to make the programme work.
Benefits of Early Payment Programmes
Early payment programmes offer several advantages for public sector suppliers:
- Accelerated Invoice Values: The total value of invoices is expedited, providing suppliers with quicker access to funds.
- Deductible Rebates: Rebates, typically between 1% and 3%, are deducted at the point of payment, proportionally to how quickly the invoice is paid.
- Reduced Costs & Resource: Chasing for payments will become a task of the past, allowing resource to be re-allocated to value-add activities across the organisation.
- No Impact on Credit Score: Unlike other financial arrangements, early payment programmes do not affect the supplier’s credit score or capacity.
These benefits, especially given the current high interest rates, make early payment programmes an attractive option compared to more traditional forms of finance.
“We continue to invoice the council as normal, but we now get paid with 3 to 10 days. It’s a very efficient system, and we no longer spend time chasing payment. It’s been a massive help to a small company such as ours.”
David Bottomley, Director, Bottomley’s Print Services
How Early Payment Compares with Other Financial Arrangements
Early payment can be a real alternative to other financial arrangements for suppliers. Let’s compare it to the most frequently used forms of finance:
- Invoice Discounting and Factoring: These methods accelerate between 70% and 90% of invoice values but come with higher rebates (1% to 5%) and setup fees. Suppliers still need to manage their sales register and chase payments.
- Overdraft or Revolving Credit: These provide an agreed amount of credit, with interest rates for small businesses ranging from 5% to 20%, plus an arrangement fee of 1% to 2%. This option also impacts credit scores and requires ongoing payment chasing.
In contrast, early payment programmes offer the full amount of invoicing at a lower fee and with no impact on credit scores, making them a more attractive option for many businesses.
Supporting Small Businesses Better
Recognising the unique challenges faced by the smallest firms, FreePay was developed by Oxygen Finance. This initiative offers early payment to small and micro businesses at no cost, meaning local councils do not charge any rebates.
Last year 15,000 suppliers benefitted from the FreePay programme, and over £2bn has been accelerated to small and micro suppliers since the scheme began.
The Path Forward: A Collaborative Approach to Prompt Payment
Prompt payment is not merely a box-ticking exercise or a regulatory burden; it is a fundamental principle that underpins a healthy, vibrant, and sustainable business ecosystem.
Local authorities, in their role as stewards of public funds and drivers of local economies, have a responsibility to champion prompt payment practices, not just because it is good practice, but because it is the right thing to do.
In a time of budgetary constraints and high interest rates, councils in particular are seeking innovative ways to support their supply chain and recoup extra savings – and we are seeing an increase in buyers and suppliers alike identifying the “win-win” factor in early payment programmes.
By embracing the principles of the Prompt Payment Code, implementing the provisions of the Procurement Act 2023, and fostering a culture of transparency, collaboration, and mutually beneficial payment arrangements, local authorities can create an environment where businesses of all sizes can thrive. This, in turn, leads to stronger local economies, more secure jobs, and better public services.
To learn more about Early Payment for your business visit oxygen-finance.com/ep where you can find all councils currently offering a scheme for you to join. If you have further questions, you can reach our supplier onboarding team at srm@oxygen-finance.com.
