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gears | accountingweb | Government gears to unveil late payment support for SMEs
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Government gears up to unveil late-payment support

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Late payments send thousands of small businesses to the wall each year and wreak havoc across supply chains. Now after years of promising to help, the government is finally ready to act.

11th Oct 2023
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The government is preparing to unveil measures that aim to help small businesses get paid on time. Accounting experts welcomed the announcement of Prompt Payment and Cash Flow Review, which ministers said was “due to be published shortly” after trailing action earlier this year.

“Late payments are a significant problem for small businesses, not just the time spent chasing for the payments but the anxiety of not knowing whether or when you are going to get paid,” said off-payroll expert Rebecca Seeley Harris of Re Legal Consulting.

Last year, small and medium-sized enterprises (SMEs) were owed on average an estimated £22,000 in late payments, the government said, adding that late payments drain the economy of £2.5bn annually.

Interventionist approach

A more interventionist approach is expected, with legislative tweaks that will extend payment reporting obligations, provide more transparency around construction sector reporting, and disputed invoice provisions.

The government said it will also provide better support for small businesses on negotiating more suitable payment terms, and on how going digital can help them get paid quicker and manage cashflow.

It will also broaden the powers of the Small Business Commissioner, giving it the ability to open investigations and publish reports on serial late payment offenders.

The updates will require fresh legislation to be approved. 

Unfavourable terms

Fingers have been pointed at large corporations that set unfavourable terms, and often delay payments, sending ripples through supply chains.

Online retailers Etsy and Amazon have been criticised by sellers for withholding funds, while Booking.com made international headlines for not paying multiple thousands of pounds to property owners with listings on its website.

“Larger companies, often acting from a position of power, unilaterally dictate payment terms that extend to 60 or even 90 days, as contractual norms when engaging with SMEs,” said Peter Winter, head of outsourcing at accountancy experts Gravita. “Yet, even with these agreed-upon terms, there is no guarantee that payments will be made on time.”

He said small businesses are often forced to accept poorer terms because of their need to win new opportunities.

“As a result, late payments are putting SME financial health at risk as it limits their growth potential and ability to create jobs, which will have knock-on effects for the wider economy,” he said.

Stretched to the limit

Small businesses have been waiting years for government help, and the issue has now “spiralled out of control” according to the Federation of Small Businesses (FSB) trade body.

FSB research found that late payments cause around 50,000 business closures each year as firms are being stretched to the limit. 

A recent YouGov survey found most MPs want tougher measures to crack down on late payments, and now action may finally be taken.

“By introducing legislation and regulations that ensure fair and timely payments, these actions will create a more equitable playing field,” said Winter. “However, we need to see collaborative efforts involving both government bodies and business associations to ensure these policies have a real impact.”

All down the line

Around 39% of finance professionals cannot close their books on time due to late payments, according to data from payment software invoice specialists Medius. A similar amount report paying supplier invoices on time is the biggest challenge for their finance department as a result, researchers found.

“Late payments are pervasive across industries as large corporations try to squeeze longer and longer payment terms at the expense of their suppliers,” said Paul Ellis, UK managing director at Medius. 

“Unfortunately, this pernicious practice massively impacts the health of businesses – in the UK, 2023 has been recorded as the worst year since records began for insolvencies, with a quarter of insolvencies being pinned on late payments,” he said.

Ellis told AccountingWEB he felt it is “high time for corporations with bad payment practices to be held to account”, giving his backing to the announcement. 

“The measures will ensure further accountability for corporations while providing small businesses with the information they need to negotiate better payment terms and to utilise technology that helps them to get paid faster and to better manage cashflow,” he said.

Targeted guidance

“Any measures are welcomed that will improve late payment for businesses but, the guidance also needs to be targeted at the companies that aren’t paying on time,” said Seeley Harris. “The standard is 30 days but a lot of small businesses need less than 30 days – let alone 60 days, which is common in bigger businesses.”

Being able to negotiate better terms for payment with confidence is a must for SMEs, she told AccountingWEB, noting that she often encounters small businesses without proper contracts for prompt payment terms.

“It is essential to make sure that both parties understand what the terms are, especially the payment terms,” she said, adding that new technology to smooth the process over is also welcomed.

“Any guidance on doing this from the government would be very helpful,” she added. “Hopefully, the Payment and Cash Flow Review will provide some valuable insight into payment practices so the government and the Small Business Commissioner can hold late-paying firms to account.”

Replies (7)

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By TB93
12th Oct 2023 09:27

Late payment support? You mean they're going to stop penalising people for paying their taxes late?
Wouldn't that be nice...

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By dmmarler
12th Oct 2023 09:58

Why can't "around 39% of finance professiosals close their books on time"? Are they fudging the numbers, or are there errors in their invoicing systems?

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Replying to dmmarler:
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By Finacta
12th Oct 2023 10:49

Yeah, what an odd statement. Late payment has nothing to do with the ability to "close the books".

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By sherodwilliams
12th Oct 2023 12:40

Its nice to see that Government will be able to support & help SME's in the better use of IT to ensure quicker payment & better cash flow. Its just another soundbyte that dribbles out of a Ministers mouth. Heaven forbid that behind all of this might be a fully costed implementation plan !
This could be the next big election blockbuster. People are being paid huge salaries to come up with these random ideas - utter madness.
The bottom line is that many SME's are family companies who do not have contingency plans for income. They rely upon those above in the supply chain to be honourable which they are not. If you have contingencies in place then it is easier to stand up to the big boys. Many who work on just in time delivery get very angry if you say no deliveries until last month is paid for. Yes they may go elsewhere but they generally don't get good service & come crawling back in short order.
One of our clients had bent over backwards to produce goods for a large corporate sometimes at very short notice. The corporate reduced orders as it outsourced some work overseas. Our client decided to close & retire. In less than 3 months the corporate approached him to do work & they professed fury that machinery had been sold & the SME closed down. Tough !!
The lesson is not to submit to corporates but stand up to them... it does not need advice or more regulation... that is the last thing anyone wants or needs.

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By Postingcomments
12th Oct 2023 18:18

If anyone pays me late, they have to grovel a bit to get a second chance. They never get a third chance.

It's easy really. Don't be dependent on any client and give bad customers the boot.

Too many companies enter into Faustian pacts with bigger companies who predictably abuse the power they have. I'd never put myself in that position.

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By fpdbookkeeping
12th Oct 2023 20:05

What it needs are really effective deterrent measures. Instead of the current interest plus penalty system, something more beefy like penalties of 25 times the value of the late invoice (ie something that will actually hurt) for 1 day overdue would sharpen financially slow operators minds. Doubt it will happen though.

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Stepurhan
By stepurhan
13th Oct 2023 16:22

As enforcement powers go "the ability to open investigations and publish reports on serial late payment offenders." is somewhat underwhelming.

Some bad payers have literally been named in this article. How is an official report going to have any more effect.

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