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Can tech turn the tide on late payments?

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With business belts tightening, the time it takes larger businesses to pay their smaller counterparts is on the rise. The government is showing little sign of taking effective action, so what can accountants do to leverage technology and ease client cashflow worries?

18th Jan 2023
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Already hard-pressed by a gloomy economic outlook, the UK’s small business community are now facing the re-emergence of a particularly unwelcome old adversary – the issue of late payments.

Government figures estimate there is more than £23.4bn currently owed in outstanding invoices to UK businesses, with small businesses spending an average of 3.6 hours a week chasing payment and the problem appears to be getting worse.

Xero’s latest small business insight report shows the average length of time small businesses wait to be paid rose 0.5 days to 30.4 days in November, while late payments also increased by the same amount to 8.1 days. This could have dire consequences, with the Federation of Small Businesses (FSB) recently warning that as many as 400,000 businesses could go to the wall as a direct result of late payments.

The government last month launched a “payment and cashflow review” with the stated aim of tackling late payments for small businesses and preventing small firms “from being ripped off by larger companies”.

While the language from Whitehall may be bold, similar reviews in the past have had little success in moving the dial. Despite establishing the Office of the Small Business Commissioner in 2016 to tackle unfavourable payment practices in the private sector, the role was not backed with powers to hold offenders to account, and the office itself is currently up for review to examine its effectiveness.

Speaking at AccountingWEB’s Live Expo in December, small business commissioner Liz Barclay said she wouldn’t support giving the office the power to fine late payers. 

“What level of fine would be appropriate against big corporations?” said Barclay. “Such costs are often passed down to consumers, and in Germany where there is such legislation, the average time to pay is actually two days longer because everyone looks for exemptions.”

At a recent FreeAgent small business roundtable Julia Kermode, founder of independent work body IWORK, was equally sceptical that such an approach would work. 

“You shouldn’t need legislation to solve this,” she said. “Red tape is not the magic bullet. Big businesses need to wake up and be more flexible in how they make their payments. Most large businesses don’t understand how to treat their small suppliers – they just don’t have the processes, culture or boardroom ethics to do so, and this needs to change.”

How can tech help?

So if the Whitehall big stick isn’t the answer and big business is showing no sign of self-reform, how can small businesses and their advisers tackle late payments? 

The government’s latest review contains a tantalising yet gnomic sentence that hints at the role it feels technology could play in bringing the era of late payments to an end: “Also within the scope of the review is the role of technology-enabled accountancy platforms in tackling late payments and promoting a better understanding of prompt payment measures within the small business community.”

The sentence is not followed up elsewhere in the review or its terms of reference, leaving the reader to guess what angle the Whitehall policymakers will take.

For those conducting the review, it may be tempting to focus on the latest tech trends or buzzwords. However, according to the accounting community, there are steps small businesses can take that don’t involve installing a sophisticated ERP system or uploading funds to a crypto wallet.

Practice owner Alex Falcon Huerta told audience members at an AccountingWEB Live Expo session that bringing down payment times can be as simple as creating an “accounts” email for the business to invoice and chase from – an approach that tackles small businesses’ fear of ruining the customer-supplier relationship by chasing for payment (even if payment is overdue).

“That way the person who runs the business isn’t chasing in person, and they can reference ‘my finance department’ during calls,” said Falcon Huerta. “We email the customer with a name and do the chasing from the client’s accounts email. We’ve had plenty of success with that approach.

“It’s also important to find out customers’ processes,” continued Falcon Huerta. “If it’s somebody manually keying your invoice into software, put the due date ahead of time to get paid on time. If you’re working on a project basis, get them to pay weekly. It’s important to keep the right mindset – you might operate a slow, manual process but we don’t, so we’ve got the jump on you.”

Automation advances

Those looking for ways in which technology can do more of the heavy lifting when it comes to getting paid can take heart at the advances made in automated tools to do (parts of) the job.

To remove a small part of the friction in the payments process, the majority of accounting platforms now offer an option to add a “pay now” button to invoices – a function also available externally via the likes of Stripe (and GoCardless for recurring payments via direct debit). Several general ledger players also have the functionality (either in-house or via an extended ecosystem) to automate the issuing of customer statements on a regular basis.

Further up the credit-control ladder, accounts receivable technology companies such as Chaser automatically chase late payments via customisable email and text reminders. This function is also offered by broader cashflow platforms such as Satago and Fluidly, which use past data to organise all debtors into a traffic-light system to allow the business to prioritise its time when choosing who to chase.

Chaser’s Miriam Owusu outlined to the AccountingWEB LIve Expo audience that while late payments should be taken on a case-by-case basis, reminders play a useful part in the process of getting invoices paid – and laying out the consequences if they’re not.

“In our experience, it takes an average of 2.8 reminders for an invoice to be paid. If there’s no response [to the reminders], you don’t want to have to take two or three months to get paid, and it allows you to set out clear expectations and timelines to customers.”

Fintech data consolidation

Chaser, along with finance platforms such as Capitalise and Satago, offers the ability to credit check new and existing customers and receive updates when a customer’s risk level changes – and escalate matters where appropriate. 

During the Live Expo session, Satago’s CEO Sinéad McHale outlined that there could be ways in which fintech firms work together with the government on the issue. “We all have so much data available but we need to get it out there to the business community,” she said. “Before a business sends the invoice, they know it’s likely to take 10–20 days to pay. There’s an opportunity to do that collectively and there could be some kind of data consolidation.”

Capitalise, iwoca, Satago, Fluidly and others offer invoice financing to cover cashflows from unpaid invoices – with Chaser and Hydr also offering an outsourced credit control function for invoices – for a percentage of the sale. 

While undoubtedly useful in removing friction, cutting down invoice payment times and improving business cashflow, add-ons such as the ones described above come with additional costs, so a careful cost-benefit analysis should be conducted to see whether it’s appropriate for the business in question.

Sadly, in some cases there comes a point where automated email or text reminders, or even friendly phone calls, don’t cut the mustard, and Falcon Huerta encouraged businesses to implement small claims when all options have been exhausted. “It’s not a nice thing to do, especially when the courts are so backed up, but even the threat of it means you’re more likely to be paid. If you are chasing people in that situation they’re probably not a good customer.”

 

Replies (5)

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John Toon
By John Toon
23rd Jan 2023 16:50

The small business payments problem rests entirely with small businesses. There is plenty of tech to ease the credit control and payments process already, coupled with pretty decent late payments law. The problem is most small businesses embrace neither and most importantly are afraid, or unaware, of utilising their legal rights.

I've never worked with a small business that has lost any business as a consquence of enforcing their contract terms but I've seen plenty of others fail , or almost fail, for not doing so...

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By Hugo Fair
23rd Jan 2023 22:43

"I've never worked with a small business that has lost any business as a consequence of enforcing their contract terms".

In which case, you need to get out into the real world more often. Try anyone who is a supplier to supermarkets, or to the public sector, or ... basically where the balance of power is dramatically unequal (due to a combination of size and alternatives).

Many of these go out of business one step earlier - when they try to 'negotiate' a better set of payment terms than those which are enforced via a 'take it or leave it' approach by the bigger business.

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Replying to Hugo Fair:
John Toon
By John Toon
24th Jan 2023 10:06

Luckily for me, at least, I've done plenty of work in the retail and food supply chain sectors and it used to be an area of specialism I worked in with predominantly small businesses. The challenges of getting products onto the shelves, in prime spots, and selling is the biggest issue. Yes, the supermarkets hold the power in terms of being able to set payment terms - typically 60-90 days but this can be managed by most small businesses effectively with a bit of planning, and usually flexible finance to manage cashflow in peak supply periods.

I'll reiterate my point though - I've never seen a small business suffer (in this sector or others) from enforcing payment terms. I could even give you examples of now well known products that have been withheld from supply to the likes of Morrisons and Sainsburys as a result of payment disputes. In the real world most supermarkets aren't actually bad payers - yes they take the p155 with payment terms but they don't often pay later unless there are supply disputes.

Biggest issue for small businesses in this industry is if your product takes off scaling up and financing supplies can be challenging as your cash turn is long and in the early days, at least, you have no credit with suppliers!

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By Hugo Fair
24th Jan 2023 13:51

"yes they take the p155 with payment terms but they don't often pay later unless there are supply disputes."

I think we're in danger of getting into semantics.
I don't disagree that a large supermarket won't usually make a unilateral decision (i.e. without negotiating with the supplier) to *extend* payments beyond the agreed terms.
BUT I certainly know of examples where 'negotiations' are entered into in mid-contract (entirely at the behest of the supermarket) - and where the negotiation is singularly one-sided (along the lines of 'accept these new payment terms or kiss goodbye to contract renewal').

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By Mary87
02nd Feb 2023 12:00

There is no doubt that late payments are having a devastating effect on small businesses. However, it is encouraging to see technology being used to ease cashflow worries. Accountants should be looking to leverage technology to help their clients get paid faster and reduce the strain on cashflow. In addition, the government should be doing more to ensure businesses are paid on time.

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