Saturday 2 February 2019

Paying Suppliers out of Fashion at Peacocks

News that Peacocks, has written to suppliers informing them that the company will take longer to pay its bills underscores the challenge that the governments' small business commissioner and lobbying groups such as the Federation of Small Business face in attempting to change poor payment practices in the UK. It also suggests a troubling and clever approach that large companies might start to use to avoid proper scrutiny of unfair payment terms.

In recent years, there has been a good deal of focus on inequitable and unreasonable payment terms, imposed by large companies on smaller suppliers, especially in retail and construction.  Recently a government select committee report highlighted how late payment was holding back small business growth and leading to business failures.

As a result of such scrutiny and the potential for reputational damage, grocery companies such as Morrisons, Aldi, Tesco and Waitrose reviewed their payment practices and announced faster payments, especially for small suppliers - which are now paid in 14 days by grocers.

The Prompt Payment Code (of which Peacocks is not a member, in contrast to close competitor Primark) requires signatories to pay everyone in under 60 days and to be moving towards payments within 30 days.

The discount clothing chain, which already gave itself a very generous 90 days to pay suppliers will, from now on, take up to 130 days to pay for goods. Managing Director Steve Simpson tried to put a gloss on the news. Focusing on how the company had negotiated a deal with invoice finance company, Tradewind, to get suppliers paid in only 10 days. The catch? A 'very reasonable' fee of 2.25% that the supplier pays to Tradewind to unlock their payment if they don't want to wait for 130 days.

Let's unpick this. A supplier sends some reasonably-priced fashion items to Peacocks, which in turn sells them for cash in its high street stores. Instead of getting paid in a reasonable time by its customer, the supplier must instead go to a finance company to get paid. The finance company takes 2.25% of the invoice value, so the supplier gets 97.75% of their bill paid for the privilege of not having to wait 120 days more for the money. Peacocks pay the finance house the full amount in 120 days time.

In effect the supplier has borrowed money from the finance company for 120 days and paid them interest at 2.25%, which works out to and Annual Percentage Rate (APR) of nearly 8%. If the supplier can access bank finance (eg an overdraft) more cheaply than this, then they’d be better off taking the bank loan or overdraft and waiting for the 120 days and getting paid the full invoice value

No doubt Peacocks will claim that their suppliers are getting paid in 10 days, but they're not are they? They're getting paid in 130 days and borrowing money at 8% a year for 120 days. Could this 'helpful' initiative for suppliers instead be nothing more than a disturbingly clever ruse to hide what in reality are terrible payment terms?