Small businesses hit by unfair contract terms

31/08/2016

Unfair treatment of SMEs by suppliers cost nearly £4 billion in the last three years, new research suggests.

According to the findings from the Federation of Small Businesses (FSB), 52% of small businesses have been caught out by unfair contract terms with suppliers and it’s putting a significant dent in their cash flow.

One in ten (11%) of those stung by unfair terms were set back by more than £5,000, while 37% lost more than £1,000.

Common complaints revealed by the research include suppliers failing to make auto-rollover clauses clear up front (24%), tying businesses into lengthy notice periods (22%), charging high early termination fees (20%) and concealing details in small print (20%).

Mike Cherry, FSB National Chairman, said: “Small firms on the bad end of a deal are losing out to the tune of £1.3 billion each year. We have identified persistent problems with suppliers, across sectors, treating small firms unfairly. This suggests the market is failing to deliver value-for-money products and services for small business customers.

“Small businesses don’t have the time, expertise or purchasing power to scour the market to find and negotiate the best deals. Small business owners behave in a similar way to consumers, but they don’t have the same guarantees of quality or legal redress in an unfair situation.”

Failing to benchmark

This failure to shop around has been reflected in other research which revealed that less than half (42%) of SMEs review their list of suppliers annually.

Worryingly, the findings from the Tungsten Network showed that only 29% do so two or three times a year and one in five (19%) only review their suppliers on an ad hoc basis or when they are dissatisfied.

This is potentially costing UK SMEs an overwhelming £106 billion.

The study, which asked 1,000 business decision makers to estimate how much they could save through shopping around for better deals, revealed that 28% thought they could save between£5,000 and £20,000, while 15% thought they could save up to £50,000.

Based on these average estimates, each SME could save £19,663 each year, which when multiplied across the UK’s 5.4 million SMEs adds up to £106 billion.

Richard Hurwitz, CEO at Tungsten Network, said: “In order to avoid paying more than they should, buyers need to develop stronger relationships with their suppliers to encourage honesty and transparency. This can have a huge impact on the bottom line.

“The savvy buyer knows that many different factors come into play when choosing a supplier. Price has a strong influence, but quality, whole life cost, security, ethics, values and reputation of a business also hold sway.”

Calls for change

The FSB research, ‘Treating Smaller Businesses Like Consumers – Unfair Contract Terms’, highlights just how vulnerable some small businesses can be with 40% of respondents reporting that they felt powerless to do anything about unfair contract terms because the supplier was too important or powerful to challenge.

In response, the FSB has called for better protections for small businesses when buying goods and services.

They have called for the Government and regulators of energy, financial services and telecoms to more routinely and explicitly focus on small business vulnerabilities and suggested that Trading Standards should also be given the power to take action against suppliers imposing unfair terms.

Mike Cherry said: “If small firms were better protected when entering a contract with a supplier, they would have more confidence and trust in the market. Suppliers would be more accountable and businesses would spend less time and money dealing with the fallout. Tackling unfair contract terms would lead to a more efficient and competitive economy.”

Have you been on the receiving end of unfair contract terms? Please share your experiences in the comments below.