Guest post by Sharon McDougall, Scotland Debt Solutions
Late payments continue to plague the small business market after years of campaigns for prompt action by industry bodies and a disgruntled industry that generates a quarter of the country’s GDP. The future of the small business market depends on prompt payments, as without this, cash flow falters, along with financial health.
Healthy cash flow is essential for any sized business, so when late payments are common, this directly threatens cash flow and has the potential to trigger a dangerous cycle of business debt.
Exclusively for Ultimate Finance, Scotland Debt Solutions’ Sharon McDougall digs deep into the late payment epidemic for small businesses, the crackdown on small business late payments, and how late payments can pave the road to insolvency.
The late payment epidemic for small businesses
Because they tend to have a larger workforce, bigger budgets and therefore increased opportunities, medium and large businesses top small businesses on the pecking order, which exposes them to companies with a greater market share and more control.
Research commissioned by the Department for Business and Trade suggests that a power imbalance across business relationships between micro and large businesses contributes towards late payments.
While micro businesses were less likely to pursue late payments formally (19%), large businesses were more likely to do so (42%). Small businesses rely on large businesses for income and therefore, avoid pursuing late payments in fear that this could damage customer relationships.
According to a report by Xero, payments to small businesses are 5.8 days late on average, for which the cost to small businesses is £684 million each year. This can have far-reaching effects on a small business, from cash flow stress, unauthorised debt, and reduced working capital.
Crackdown on late payments to small businesses
The government have been proactive in the crackdown on late payments to small businesses in recent years as late payments cost small businesses £22,000 a year, with 56 million hours of lost productivity, according to Intuit QuickBooks.
Late payment reporting for large businesses
New regulations were introduced in 2017 which require large companies and limited liability partnerships (LLPs) to publicly report twice a year on their payment practices and performance, including the average time taken to pay supplier invoices.
The Small Business Minister at the time, Margot James, said:
“The UK is home to a record 5.5 million small businesses and the industrial strategy will help address many of the challenges they face getting finance and scaling up.
“It’s completely unacceptable that small and medium-sized businesses are owed £26.3 billion in late payments, which hampers their ability to grow and has no place in an economy that works for all.
“Large businesses have an important role to play and the guidance published today will help them fulfil their responsibilities and improve payment practices across the board.”
Fair Payment Code
The Fair Payment Code, formerly the Prompt Payment Code (2008), is expected to be more ambitious, aspirational and robust. The Fair Payment Code introduces gold, silver and bronze award categories to easily grade the payment practices of a supplier. Large companies must also include payment reporting in their annual reports.
The Small Business Commissioner, Liz Barclay, said:
“I am delighted to announce a new Fair Payment Code will be launched this autumn. The new code will reward businesses that treat their suppliers fairly and pay them quickly. It will also include an ambitious new Gold Award which aims to make 30-day payments the new standard for which businesses can aim.”
The reform of the Fair Payment Code was part of Labour’s manifesto pledge to unlock over £20 billion worth of overdue invoice payments to small businesses.
Late payments and the road to insolvency
Customer payments that are critical to the survival of a business can pose an existential threat when received late. While businesses must diversify their client base and spread the risk, this may be unavoidable for small businesses whose most reliable contracts are high value.
To monitor whether the health of a business is at risk due to late payments, it is important to recognise the warning signs of insolvency.
Here are some of the basic warning signs of potential insolvency risk:
- Unable to make payments as and when they fall due (Cash flow test)
- Debt outweighs assets (Balance sheet test)
- Creditor pressure
- Hit credit or overdraft limit
To help rescue a company in financial distress, seek support from a licensed insolvency practitioner who can advise on how to negotiate debt repayments and enforce a stringent debt collection strategy. Once your business is back on track, you may consider invoice finance to release cash tied up in invoices and to seek protection against bad debt.
We would like to thank Sharon for her contribution. If you are a business owner dealing with late payments issues, our funding solutions can help you keep moving in the right direction: Invoice Finance provides funding against invoices yet to be paid, removing the need to wait for customers to repay to access the cash due to you. Get in touch with our team today to find out more about how we can help you meet your ambitions.
