Here at Advocate Commercial Debt Recovery, we’ve seen an increase in large businesses delaying payment to Small and Medium Enterprises (SMEs). In a given month, we’ll get multiple instructions against the same multi-million-pound businesses that are seemingly treating their creditors as sources of interest-free credit. With the number of insolvencies at a thirteen-year high, the cost-of-living crisis is now a cost-of-doing-business crisis. CEOs in overpriced cashmere suits are big on vocalising how hard times are because of increased energy, raw material and labour costs. Their make-believe personal hardship is often used as an excuse to squeeze the workforce and an opportunity to delay payment of overdue invoices.
Truth be told, it is SMEs who are least insulated from the existential threat of the cost of doing business crisis.
It’s not just big firms running roughshod over SMEs. In recent years the NHS has consistently paid 60-70% of undisputed invoices within thirty days, with the London Boroughs of Ealing and Southwark running similarly low percentages. When you delve into payment performance for county, district and city councils, the worst payers tend to be those in the most deprived areas.
The Public Procurement Review Service (PPRS) was set up in 2011 to oversee public sector procurement and investigate complaints on behalf of SMEs. Despite the PPRS being touted as the jewel in the Crown’s crown protecting SMEs against unfair tender and payment practices, the service received just 94 cases last year. Of that, a third were related to payment not being received on time. For the same period, Advocate actioned more than threefold that number of cases against public sector bodies. Some public sector bodies fare much better than others when it comes to making payments on time. Councils like West Sussex and the City of London rank alongside the Department for Education at upwards of 95% of invoices paid within thirty days. The Ministry of Defence proudly and consistently sits at 99%, but when you’re buying bombs and bullets, it’s generally unwise to war with suppliers!
Time Is Money
The latest FSB Time is Money Report found 62% of the British public are of the view businesses should be paid within seven days from invoice, and 55% support more controls being put in place to stop businesses paying late. Depending on where you are in the UK, anything from 45% of businesses in Wales to 56% of businesses in the South East reported an increase in late payment during 2022. Here at Advocate Commercial Debt Recovery, we’ve seen an uptick in instructions from the worst affected sectors, namely manufacturing, construction and STEM. In contrast, the financial services, accommodation and food sectors are the least affected. Only B2C fairs are better for late payment. Some of our larger debt recoveries have been notable by the urgency of clients on the precipice of having to take out a working capital loan. FSB research shows that 11% of SMEs took out loans in 2022, and of those, over a third were to manage cash flow. The timing of taking out a loan is crucial. Lenders will refuse credit to an SME if they have excessive creditors or debtors, something that would be eased by a loan. Research by the Business Banking Resolution Service (BBRS) identified that 5% of SME owners believe they will be unable to service their debts in 2023, and 41% believe their business will be in financial difficulty this time next year. The BBRS also found 30% of SME directors had acted as personal guarantors for a business loan.
Late payment is endemic across the economy. There is no sector or industry that hasn’t seen an increase in payment delays since 2020.
Previous research from the FSB highlighted the severity of late payments and surmised that 50,000 business closures each year could be avoided if payments were made on time. The attrition rate of SMEs since 2020 continues to be high compared with the previous decade. Read into the liquidator report for a given SME, and the chances are you will see cash flow and late payment as key contributors to their demise. At Advocate, an increasing number of clients are being given ‘take it or leave it’ payment term ultimations from their customers who want to move from 30 days to 45, 60 or even 90 days. Surprisingly these customers include cash-rich PLCs and blue-chip goliaths. As manufacturing and tech giants are finding, when their supplier decides to ‘leave it’ Advocate’s debt collection process can swiftly extract payment.
The Wrong Ups and Downs
Research from small business lending firm Iwoca found the biggest concern for SMEs in 2023 is the increased cost of doing business, according to 32% of respondents. Second, on this list is the threat of recession (12%) with higher interest rates and insolvency joint third. This year sees corporation tax go up. The minimum wage goes up. Rents up. And the cost of doing business continues to go up. Whilst sellers of essential goods can maintain their margin with price increases because customers have no other option, most SMEs don’t have that luxury as it would induce a self-inflicted recession. Finding ways to reduce costs without reducing quality or service is a never-ending battle. Data from the Office for National Statistics found 18% of large companies have less than three months of cash reserves to rely on. The same figure for micro businesses (less than ten employees) is 36% which makes them especially vulnerable to economic downturns and rising costs. Research by Yell found nearly a million SMEs had less than £1,000 in savings going into 2023, with 10% of SME owners not confident they will still be trading in six months.
How are Businesses Cutting Back?
When times are tough, pay increases, staff perks, and corporate events are high on the list of cutbacks. Essential costs like insurance, marketing, and IT also make the list of items under review. More often than not, these three are bound by strict cancellation terms and conditions. At Advocate, we’ve seen an increase in debt recovery cases for these kinds of defaulted contracts. Terminating an agreement before absconding and hoping the creditor goes away is far more likely to result in court action than actively trying to renegotiate. Cutbacks can also happen in more mundane supplies; think Duncan Bannatyne, who famously refused to buy paperclips because so many arrived in the mail each day.
The Time is Now
Indications around future interest rates, inflation, commodity prices, and economic growth are not terrible. They’re not great either but certainly much less a sense of impending doom these days. This is the brightest economic outlook for three years as many businesses see an opportunity to do more than just tread water. Some sectors are already seeing growth. At Advocate we’re hearing that when clients try to grow their business, they quickly redline the rev limiter that is cashflow. That theme is the common denominator in over a third of cases referred to Advocate each month. Here lies the issue – late payment not only stops viable businesses from covering overheads, but it also stunts growth because cash is being used to survive rather than thrive. In short, businesses must act now to recover payment of overdue invoices or pay the price for latency later. Debt collection firms like Advocate are primed and ready to stop your debtors from treating you like an interest-free credit facility. Instructing us can literally make the difference between stale beer and champagne success!