Friend or foe?

Posted on 17 May 2012

David Smith, managing director of Positive Cashflow Finance, says the Late Payments Directive may do more harm than good.

It is easy to assume that charging interest on late payments will improve manufacturers’ bottom line and encourage buyers to pay on time. However, the much discussed EU directive, which allows creditors to charge interest without giving any prior notice as well as demanding reimbursement of recovery costs, could have unforeseen and detrimental effects on the relationships that SMEs have with their buyers.

I applaud the government and business owners for stepping up and talking about the problems that plague manufacturing SMEs but I believe that this EU directive may spark new issues while only addressing the symptoms and not the cause of the late payment problem.

That problem is namely the power discrepancy between massive multi-national buyers and small or medium sized manufacturers. The latter can often not survive without the business of the larger buyers. It has been said that large companies in particular are the ones not paying the invoices of their SME suppliers in a timely manner and that those SMEs are often afraid to come forward for fear of being blacklisted for future work.

The power imbalance not only keeps SMEs from complaining but it also pits small manufacturers against each other. The fight to win a big client often pushes small businesses to charge very little more than their costs in an effort to win the contract. The EU directive does not address the issue of power as it only states that businesses have the option of charging late payment fines. I imagine that many small manufacturers, which fight for every contract, are uncomfortable with the idea of charging their most important clients late fees for fear of losing out on business.

So what are the alternatives?

Invoice finance is a funding option that an increasing number of small manufacturers are turning to in order to remove themselves from the power struggle they face with large and powerful clients.

Invoice finance enables a business to draw money against its invoices before the customer has paid. A funding line minimises the negative effects of being paid late, meaning there won’t be a need to charge the fines outlined in the EU directive and face the possible negative side effects.

Additionally, this method removes manufacturers from the cycle of late payment by providing them cash flow to pay their suppliers on time, even if their clients haven’t paid on time.

Case study: Harviglass-Fibre

A producer of glass fibre reinforced plastics received a £175,000 funding line from Positive Cashflow Finance to reach its goal of a £1m turnover in 2012.

Harviglass-Fibre is the market leader in the development and production of glass fibre reinforced plastic products.

The invoice finance facility will maintain Harviglass-Fibre’s cash flow, enabling the management to focus on further growth beyond the North West. The management team comprises five directors and employs 11 staff.

Will Austin, sales director at Harviglass-Fibre, said: “As a small manufacturer we face many challenges and cash flow is certainly one of them, which is why we were so happy to have the deal completed in just 72 hours. The funding line will give us the freedom to install the most up to date facilities and capitalise on the growing demand for fibre glass products, which has been driven in recent months by innovations in shop fittings and automotive parts.”