Careful who you buy from: SMEs & the supply chain
SMEs are currently facing an increasing number of problems which can have a significant effect on their cash flow, particularly with the supply chain. Late payments and bad debts have an impact but increasingly they are also being squeezed by unfair terms imposed by suppliers. A recent report from the Federation of Small Businesses highlighted the issue and presented some alarming statistics.
The overwhelming view is that suppliers are taking unfair advantage of SMEs who suffer from a lack of purchasing power compared to large companies and multi-nationals. SMEs have little choice when buying goods and services. They will usually pay a higher price than larger organisations because they cannot benefit from bulk savings and the economies of scale. In addition they are often forced into making unpalatable choices. 40% of the survey respondents felt that they were powerless and could not get better deals. Suppliers are perceived as being opportunistic and potentially could be recouping the cost of attractive discounts offered to large corporations by offering unfair and expensive terms to SMEs. More than 50% of respondents felt taht they were taken advantage of by suppliers through unfair contract terms, over the last 3 years.
Problems for SMEs
Specific practices which between 20% and 25% SME owners say they have been faced with:
- Hidden detail, particular where terms are unfair to the customer.
- Excessive fees when wishing to terminate a contract early.
- Auto rollover clauses which tie buyers automatically into a new contract at the end of the initial term.
- Unwittingly being tied into lengthy contracts.
The FSB has called for better protection for SMEs against unscrupulous behaviour on the part of suppliers. There are a number of specific disadvantages facing the SME buyer of goods and services:
- Lack of time and expertise to find the best deals
- Lack of purchasing power with orders often placed infrequently, irregularly and for small amounts (as discussed above).
- Unable to achieve the same guarantees of quality as larger companies particularly in relation to services they receive.
- Difficulty in seeking legal redress because of lack of funds and knowledge about the avenues open to them.
- Disproportionate effect on SME owners because they have a low turnover and a more delicate cash flow.
The cost to SMEs
Some disturbing figures have emerged from the research. With 10% of respondents saying the impact on them has involved losing more than £5000 in relation to a specific contract or purchase. More alarmingly 40% said they had lost more than £1000 as a direct result of an unfair agreement.
Late payments are also significantly increasing for SMEs with respondents with a turnover of less than £1m stating that 71 days was the average length of time they had to wait for invoices to be paid. This is as much as 6 weeks longer than for large firms.
What remedies and support are available for Small Business owners faced by problems with the supply chain? There are a growing number of companies and organisations who are trying to harness the benefits of bulk savings by brokering deals on behalf of SMEs, on a consortia basis. Some of these require a membership fee to be paid for their services. Membership organisations such as the FSB provide a range of support and discounted services for members. Some organisations such as Business Cost Saving (www.businesscostsaving.co.uk) offer their services free, making their income from supplier commissions. In terms of late payers and bad debts it is important to have a robust credit control system in place and to know when to call on expert debt collection agencies. For a free chat about your credit control system please give the Debt Recovery Bureau a ring on 0800 440 2359.
If you are interested in the full FSB report you can read it here.