Paul Uppal, the small business commissioner, has urged small businesses not be afraid to come to the commission for help with late payments. His comments come as yet more research shows that late payment is still a major problem for small businesses – despite the Government’s attempts to tackle it.
The late payment problem
The research by Xero was based on 7.5 million anonymised invoices with 30-day payment terms issued through Xero during the past year. The company found that more than half of the invoices in 2017 were paid late, with an average of 52% paid when they were overdue.
Unsurprisingly, the first quarter of the year was the worst for late payment. The average number of days for a UK small business 30-day term invoice to be paid was 39.4 (approx. 40 days), with a high of 42.59 days in January 2018 and a low of 38.66 days in December 2017.
Further analysis of FTSE 350 companies showed that on average, they pay their invoices after 46 days, 6 days longer than smaller firms. Some FTSE 350 companies in the pharmaceuticals and biotechnology sector were also revealed as the most inconsistent payers, paying invoices after an average of 47 days in 2017, with a low of 37 days in September 2017 and a high of 68 days in June.
“It’s understandable that small businesses in the UK have come to see late payments as a scourge, especially at certain times of the year,” says Edward Berks, EMEA Director, Fintech & Ecosystem at Xero.
“They have a highly detrimental effect on cash flow – and can even hamper the ability to pay suppliers and employees. In a very real sense, late payments result in late payments.”
Late payments also undermine the ability of small businesses to forecast cashflow accurately and, in turn, their ability to seek or attract investment. Xero’s 2017 Make or Break report showed that 50,000 small businesses fail each year due to cash flow issues, with 60% blaming poor access to capital. With small businesses responsible for 51% of private sector turnover in the UK, what’s bad for small business is bad for the economy.
Vicky Pryce, previous director general for economics at the Department for Business, Innovation and Skills, says the impact of late payments on the economy can’t be exaggerated. Citing research by the European Commission that shows late payments are directly associated with worsening cash flow, she points out that late payments leave small businesses with no option but to request overdraft extensions or increase borrowing, thus increasing their financing costs.
“Late payments prevent the economy from reaching its productive potential,” she warned.
So, who are the worst late payment culprits?
On the black list of the slowest sectors to pay small businesses in the past year are food producers (averaging 60 days), construction and materials businesses (averaging 57 days), and household goods firms (averaging 53 days).
The late payment solution
The Government recognises the impact of late payments. The Late Payment of Commercial Debts Regulations 2013 introduced new rules related to payment periods and the dates from which statutory interest runs on commercial debts, helping small businesses to recoup the cost of chasing payments and claw back lost interest. The Prompt Payment Code was also introduced. However, the data proves it’s not enough.
“While inroads have been made to tackle this issue, it’s clear that we need to go beyond legislation or regulation,” says Paul Uppal, the small business commissioner who was put in place primarily to tackle this issue.
“We need a cultural shift – both among our biggest companies and our small businesses too.”
He believes that it’s vital to make businesses realise the damage late payments do to the economy, and to understand that preventing this damage benefits bigger businesses just as much as smaller ones.
The small business commission provides general advice and information on resolving disputes and signposts small businesses to existing support and dispute resolution services through its website.
“We are still in our early days, but we will not be afraid to name and shame companies once we have built up evidence against bad payers,” says Mr Uppal.
However, he warns that the “huge issue that prevents us taking action” is the number of companies unwilling to come forward and make a complaint or seek advice. As a previous owner of a small business himself, he says he understands the sensitivity of the issue and the fear of jeopardising a relationship with a customer but says the small businesses that ask for help “are more progressive and are more likely to do well.”
“Rather than accept the status quo we need small businesses to come forward and be ready to challenge the behaviour of their larger customers.”