If someone offered your business improved cashflow due to payments being received more quickly than your usual payment terms, less time wasted chasing payments and managing payment disputes, leading to reduced stresses on the business and your staff, would you welcome it?
This is exactly what is being offered through Project Bank Accounts (PBAs), promoted by Welsh Government’s PBA policy (Welsh Procurement Policy Note (WPPN 03/21) as a means of facilitating fair and prompt payment for SMEs who play a critical role in public sector supply chains but who can find themselves on the receiving end of extended payment terms and poor payment practices.
But what exactly are PBAs? They are simply ring-fenced bank accounts backed by trust status and set up through many of our major retail banks, that act solely as a mechanism for making payments. Traditional multi-layered payment terms between subsequent tiers in the supply chain have resulted in sub-contractors commonly having to manage 60-90 day, or longer payments terms in some instances. PBAs can change all that, making payment in 3-5 days from the deposit of money into the account following the usual certification of the payment schedule and submission of a correct invoice. For a sub-contractor this can mean being paid in 7 to 14 days from submission of their invoice.
PBAs represent best practice in ensuring fair and prompt payment in the supply-chain, ensuring improved cash flow, helping to reduce supply chain failure for Welsh business. In addition, as they speed up payment, they provide the opportunity to put that money to work more quickly to the benefit of our economy and local communities. Businesses who have benefitted from PBAs have reported being able to bring forward the purchase of new plant and machinery that improve their productivity and competitiveness. Quicker and more certain payment also has the potential to build business confidence to create training and high-quality employment opportunities.
For many Welsh businesses PBAs must sound like Christmas has come early. And yet, a recent PBA survey undertaken by Constructing Excellence in Wales (CEW) with a split of micro and small business (47%) and medium sized business (53%) found nearly a half of respondents characterised their understanding as either having ‘no knowledge’ of a PBA or ‘a basic understanding but unclear about how they worked or the benefits of using one’.
It appears, the larger the organisation the better the knowledge of PBAs. This highlights a real need for better communication to micro and small businesses who do not have the time or staff to study the detail. Not only will their cash flow improve dramatically through faster payments, but there is protection of any money held in a PBA for payments to sub-contractors signed up to the PBA arrangement in the event of insolvency of the main contractor.
Work still needs to be done to raise awareness amongst businesses in our supply chains of the benefits of PBAs and how they operate. In particular to dispel myths about ‘red tape’ and costs to SMEs who join a PBA…
The need to embrace PBAs couldn’t be more urgent as the latest figures from *Begbies Traynor’s ‘Red Flag Alert’, which monitors the financial health of British companies, as reported on BusinessLive this October explains; More than 17,500 Welsh business found themselves in ‘significant’ financial distress during the third quarter of 2022 and Wales saw a 4% increase in the number of companies struggling between July and September 2022 to 17,527. This was a 5% rise on the same period in 2021. Construction businesses in the region are the most affected, with 2,796 companies in significant financial distress during the past three months.
And it’s easy to sign up to a PBA; Some sub-contractors will be invited to join the PBA but anyone can ask to join. The sub-contractor simply signs a Joining Deed which is supplied free of charge by the Welsh Public Sector client or main contractor. Payment via a PBA is also free of charge to sub-contractors. Bank administration and payment transaction costs are paid by the account holder(s) who will be the Welsh Public Sector client and/or main contractor.
PBA policy says that in all cases where a PBA is applied, Tier 2 or lower tier suppliers who account for at least 1% of the net contract award value must be invited to join the PBA and Tier 2 or lower tier suppliers who account for less than 1% of the net contract award value, should be allowed to request to join the PBA. Acceptance of such requests should be made conditional upon the agreement of both the WPS and main contractor.
So, for SMEs working within the construction sector, PBAs really do represent a win-win scenario. They just need to embrace what’s on offer and reap the benefits!
