Tesco payment terms – a fair deal for all?

shutterstock_247704262Tesco’s announcement earlier this month to reduce payment terms to 14 days for its smallest suppliers will come as welcome news for many small firms. Having been a barrier to many when considering entering listings with the supermarket, the change in terms will inevitably open up more opportunities as confidence in fairer payment processes increases, or so we should expect. But just how many small suppliers does Tesco actually have and to what extent will the new payment terms differ from current practice?

Upon analysing our own client base, we have a small portion of clients that sell less than £100,000 worth of products to Tesco who will directly benefit from the new terms. So there is proof suppliers of this scale do exist. The concern comes, however, when Tesco explains how the change will lower the payment terms from the industry standard of 28 days. It is widely accepted among business that the ‘industry standard’ does not reflect the reality of payment to suppliers and in our case, smaller suppliers are currently receiving payment from Tesco at 45 days on average.

How closely adhered the new terms will be is something unfortunately only time will teach us once the arrangements have come into force in June 2016. And while the introduction of a Government Small Business Commissioner next year will only help by adding pressure to the new promises, businesses must remain cautious. At a time when there is little power to actually enforce change, companies must assess their options and find alternative ways in which to secure continued cash flow and free up capital to invest in new buyer-supplier relationships, while mitigating the debilitating risks of late payment.

An equal concern among many businesses is the threshold of £100,000 that Tesco considers small suppliers. Indeed a vast number of our clients sell more than £100,000 worth of products but less than £1million and it is these firms that, even despite proposed changes, will be missing out on better payment structures. Equally, the firms that sell just over £100,000 and are supplying alcohol or clothing will continue to suffer with payment taking up to 55 days.

There is clearly still a lot of work to be done. While Tesco cannot be criticised for admitting its faults and being the first to announce standardisation of payment terms, there are still many small and medium-sized firms that sell more than £100,000 worth of products to large corporate businesses. In fact, these companies account for almost 30% of the total amount owed to our client base. These businesses are equally as vulnerable, so upping the threshold limit must therefore be considered.

Business continuity and specifically cashflow is always the biggest challenge for small businesses but just as Tesco has realised, with better payment structures, comes more appetite and greater competition, ultimately leading to the best possible product or service for customers. Unless this is understood and acted upon by other industries so a new era of transparent and fair processes for all can be introduced, business growth and economic prosperity will continue to be held back.

John Atkinson, head of commercial business at Hitachi Capital Invoice Finance