Late payments force small businesses to the edgeby
Payment delays continue to cause small and medium-sized businesses stress and anxiety, with new research revealing that 61% of invoices issued by UK SMEs remain unpaid within the debtor day period. But what can be done to stop this?
A new report has found that large companies are continuing to ride roughshod over their small suppliers by not paying them on time or in full.
The report, commissioned by Amicus Commercial Finance, found that 61% of invoices issued by UK small and medium sized enterprises (SMEs) remain unpaid within the debtor day period. Of these, 70% of firms say they rely on getting paid during their debtor day period to avoid facing a shortage of working capital.
The research also showed that that one in six (16%) SME invoices remains unpaid after 90 days and of these, almost half (7%) have yet to be settled after six months.
The study underlines the extent to which SMEs often rely on a small number of customers and delayed payments from these can have serious consequences; according to the findings, SMEs’ top three customers on average account for almost half (49%) of their overall revenue.
A recent report from the Federation of Small Businesses (FSB) also highlighted problems around the UK’s poor payment culture. Small businesses report that on average 30% of payments are typically late - compared with 28% in 2011.
The impact this can have on small businesses can be devastating: 37% of small businesses have run into cash flow difficulties, 30% have been forced to use an overdraft and 20% say profits have been hit.
At the extreme end, late payments and resulting cash flow difficulties have caused businesses to fail. In 2014, if payments had been made on time and as promised, 50,000 businesses could have been saved, growing the UK economy by £2.5bn.
With the gig economy – where short-term contracts for self-employed workers is the norm – becoming increasingly common, this situation is likely to force more individuals and small businesses over the edge, particularly around Christmas and new year when funds are generally scarce.
But how can small businesses cope with late payers? What tools, statutory or otherwise, are available to SMEs to help speed up the payments process and ensure cash continues to flow?
What powers are available?
Despite numerous government pledges, a succession of delays has hampered efforts to bring in new legislation to toughen up the UK’s payment code.
A small business commissioner, pledged in the Queen’s Speech 18 months ago, has yet to materialise, although a consultation on what powers such a position would have closed on 7 December – we await the findings of this condoc later this month.
The Late Payment of Commercial Debts Act (1988) was amended in 2002 to include fixed penalties, and businesses or freelancers can charge £40, £70 or £100 depending on the size of the invoice (less than £1,000, less than £10,000 and above £10,000, respectively). This can be charged in addition to the interest payable at 8% over Bank of England base rate.
However, many freelancers or small business owners, particularly those looking to stay onside with large companies responsible for a large proportion of their income or new customers, are often reluctant to get on bad terms with later payers.
The FSB has also called for the Chartered Institute of Credit Management and the Department for Business, Energy and Industrial Strategy (BEIS) to give real substance to the Prompt Payment Code (PPC) through a ‘three strikes and you’re out’ penalty system that tackles repeat offenders, and by making the PPC mandatory for the largest firms.
Best practices to avoid late payments
Speaking to AccountingWEB at the Accountex Conference last year, business consultant Peter Dilger urged company owners or finance departments to be more proactive in their credit control dealings.
“When do you start sending invoices?” he asked. “When do you start chasing? If you’re waiting until the customer is 30, 40 or 50 days overdue before you start to chase them, that’s too late.
“Ultimately you’re in control of this. You might not want to lose business, but a customer who doesn’t pay is not a customer.”
Another best practice to adopt when you’ve agreed to work with a company is to send over terms and conditions for their written approval, setting the tone for what to expect from the business relationship. Whether the company agree to this or stick to the terms is often, unfortunately, another matter.
Early payment discounts can also incentivise prompt payment. Some businesses offer a small percentage discount, which they will get discounted from future invoices as a credit or simply taken off their bill. While this method may help with the business relationship and maintain cash flow, it does further reduce margins at a time when they may already be squeezed.
Name and shame
A more direct approach is to ‘name and shame’ late paying companies. While some opt to use social media sites such as Twitter, there are also websites such as the Forum of Private Business’s ‘Hall of Shame’, where firms using bad payment practices are singled out.
However, unless done anonymously, which lessens the impact of the complaint, this can become a potentially tricky avenue in terms of continuing the business relationship. Also, unless the invoice terms are completely watertight (and in some cases even if they are) the complainant may hear from the large company’s in-house legal team.
What steps does your company take to deal with late payers? Are there any powers you’d like to see enacted when the small business commissioner legislation appears later this month?