The Prime Minister David Cameron, who announced the consultation today whilst visiting small businesses in the East of England, stressed the “vital” importance of SMEs to the economic recovery.

“It’s not right that suppliers are not getting paid on time for the work they do and the services they provide and I know that late payment can have devastating effects on our small and medium sized businesses,” he said.

“The government has already taken steps to help address this issue but I am clear that more needs to be done to build a business culture across all sectors of the economy that sees the fair, prompt and reliable payment of suppliers become a core corporate responsibility which is taken seriously at the most senior levels.”

The consultation will call for views on a range of questions, including how the Prompt Payment Code (PPC) can be strengthened (see below for a list of consultation questions).

Consulation Questions

  1. How can we encourage greater oversight and responsibility for payment policies at senior management and board level?
  2. What can be done to increase transparency around which companies are good payers and which ones are not?
  3. How can the Prompt Payment Code be strengthened and is there more that can be done to hold companies to account against it?
  4. Can more be done to enforce existing legislation, including the provisions on payment terms – for instance the prohibition of ‘grossly unfair’ payment terms?
  5. What can be done to encourage more companies to make use of their existing statutory right to interest for late payments?
  6. Is there a case for further legislation or penalties?
  7. Can government do more to help SMEs to help themselves, including through new technologies and services like electronic invoicing and mobile payments?

The PPC has drawn criticism for its negligible impact, given that only 1,500 of Britain’s 4m plus firms have signed up to it, including less than half of the FTSE 350.

In addition, of the firms that have signed up, some have reportedly stretched settlement to 120 days, according to the Federation of Small Businesses.

FSB national chairman John Allan said: “Late payments is an increasing issue for our members. Being paid late or given extended terms can severely hamper many small firms.

“They simply don’t have the same cash-flow buffer as a large businesses, so being paid on time can be the difference between being able to pay staff and not. Furthermore, when a small firm is paid late they then can become late payers themselves.”

Katja Hall, chief policy director for the Confederation of British Industry (CBI), said: “Late payment is a serious issue for all businesses but particularly for smaller firms, as cash flow is their life blood.

“Businesses already have a number of routes for recourse if they are paid late, but the reality is that few choose to act on late payment for fear of fall out with their customers.”

According to a YouGov poll of 1,100 SME decision makers, commissioned by Barclays, 85% had experienced late payment over the last two years, 30% of which had had to use personal money or assets to boost their cash flow.

Of the respondents who had experienced late payment, 11% said it had nearly caused their business to fail, while 66% said that on average they had had to wait more than a month past the agreed payment terms for a bill to be paid.