One of the Government’s pre-election promises to small businesses was measures to tackle late payments. But according to new figures from Bacs Payment Schemes Limited (Bacs), the company behind Direct Debit and Direct Credit in the UK, SMEs are spending more than ever on chasing late payments.
Late Payments Cost Nearly £1000 per Month
The research by Bacs revealed that SMEs are spending a collective £10.8 billion a year attempting to recover overdue payments, up from £8.2 billion in July 2014. This means that each business is spending, on average, around £955 a month on late payment recovery.
However, overall late payment debt appears to have peaked, says Bacs, and it is now on its way down; the total amount owed to both large and small UK businesses is now only £31.3 billion, down significantly from £41.5 billion in July last year. £26.8 billion of that debt is owed to SMEs, down from £32.4 billion last July.
But overdue payments are still proving a problem for businesses, and 80% of all companies experiencing tardy payments say these payments are late by a month or more, while 24% admitted this leads to a reliance on bank overdrafts and 26% admitted it causes them to become late payers themselves.
In January 2015, Michael Fallon, who was Business and Enterprise Minister at the time, announced he was ‘going to war’ on late payers, saying: “Cash flow is the lifeblood of small companies. Poor cash flow is how small businesses go under.”
Mr. Fallon had previously issued invitations to all businesses in the FTSE 350 to sign up to the voluntary prompt Payment Code, run by the Chartered Institute of Credit Management on behalf of the Department for Business. Code signatories undertake to
pay suppliers on time, within the terms agreed at the outset of the contract, without attempting to change payment terms retrospectively or changing practice on length of payment for smaller companies on unreasonable grounds
provide suppliers with clear and easily accessible guidance on payment procedures and their system for dealing with complaints and disputes, advising them promptly if there is any reason why an invoice will not be paid to the agreed terms
encourage good practice by requesting that their lead suppliers encourage adoption of the code throughout their own supply chains
pay suppliers within a maximum of 60 days (in line with late payment legislation requirements) while working towards adopting 30 days as the norm, and to avoid any practices that adversely affect the supply chain.
The Minister gave the remaining unsigned companies one month to either sign up to the new rules on paying their suppliers promptly or risk being “named and shamed”, and in the March budget, George Osborne also promised to extend the voluntary prompt payment code, to which 1,700 companies had already agreed.
The EU late payment directive already stipulates that public authorities and private companies must pay their suppliers within 30 and 60 days respectively, or explain why.
Low Impact Initiatives
But only 24% of the companies that Bacs surveyed said they were aware of measures that oblige large and listed companies to publish payment practices, and 76% don’t feel these measures will improve the speed with which they are paid anyway.
Mike Hutchinson from Bacs said: “Our figures show that while the late payment landscape is improving in terms of the totals owed, it is at a cost, and a very real one, with SMEs having to dip into their pockets to chase money they are owed. We urge businesses to look at automated payments like Direct Debit to reduce the time and money that companies are spending to recover payments due to them.”
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