Late Payment – The Small Business Assassin

Posted in February 2016

Late payment and small business

New data released by the Chambers of Commerce has highlighted the negative impact of late payment on small businesses in the UK. 76% of freelance contractors, small businesses and sole traders report being paid late in the past 12 months. The biggest problem these businesses face is not finding enough work or making enough profit, but cash flow problems caused by not being paid on time as expected and agreed.

While late payment affects businesses of all sizes, it’s not such a big problem for large businesses who often agree extended payment terms with their suppliers to offset the squeeze on cash flow. For small businesses it’s almost impossible to get their suppliers to agree to payment terms in excess of 30 days, indeed for start-ups and businesses in their first year of trading it can be difficult to even obtain credit accounts.

If you go back just a few years the late payment spotlight was very much on the public sector. Successive Governments have done much to tackle the issue and now all public sector organisations including Government agencies, local authorities and the health service are bound to pay invoices issued by small and medium sized businesses within 30 days.

Just 9% of SME’s reported receiving late payments from the public sector over the last 12 months, compared to 67% receiving late payments from the private sector.

Key data findings

  1. An incredible 76% of small businesses suffered cash flow problems in the last year as a result of goods and services not being paid for on time.
  2. Two out of five of those businesses that have experienced late payment indicate 32% or more of the invoices they issued were paid late.
  3. 25% of small firms battling late payment spend over three hours per week chasing late payers. Just over 50% are owed at least £5,000 in overdue payments and around 20% have more that £20,000 outstanding.
  4. 89% of SME’s indicate the private sector is now the biggest problem and is responsible for the vast majority of unpaid invoices.
  5. Two thirds of small businesses have written off unpaid invoices over the past 12 months; with a fifth writing off more than £5,000.
  6. The inability to pay suppliers and lower profits are cited as the major problems caused by late payment.
  7. Only 19% of small firms have charged or attempted to charge late payment interest on overdue invoices.

Late payment in the private sector

Most firms in the private sector supply other firms in the private sector and they will all be aware of the problems associated with late payment. You would think the sector would be self-regulatory by setting an example and ensuring that payments are made on time. Sadly the reverse is true.

The problem of late payment in the private sector is endemic, many firms have no choice but to delay payment as they themselves get paid late. This results in a never ending cycle of late payment, a chain reaction from the top to the bottom of the supply chain.

At the release of the latest data 47% of SME’s were waiting on overdue payments of between £1 and £5,000, 31% are owed between £5,001 and £30,000 with 12% off small firms owed in excess of £30,000 in late payments.

Small businesses do not have the financial or time resources of larger companies, yet spend far more time per staff member chasing payments. 56% of owner managed businesses spend between eight and twenty six hours per month chasing payment of unpaid invoices, with one in eight spending more than twenty four hours every month simply trying to get paid. This is time that could be better spent on quoting for new work, marketing and growing the business.

Often small firms will accept the culture of late payment and turn to other methods to ease cash flow, including reducing costs and taking out short term funding. The usual route to funding for small firms is a bank overdraft; these facilities are expensive and almost impossible pay off down the line without improving cash flow.

Late payment or bad debt?

The danger in not chasing late payment is bad debt. If your customer is being pursued vigorously by a number of creditors and you simply accept you will be paid late, you will be at the end of the queue for payment and at the greatest risk of incurring a bad debt should the business fail.

In the last 12 months the data shows 44% of SME’s have been forced to write off between £1 and £5,000, and 16% of small firms have been forced to write off between £5,001 and £25,000. These write offs directly hit cash flow and profitability. The data also reveals the totally unacceptable situation of larger companies in financial distress continuing to order goods and services from smaller enterprises in the knowledge their company is about to fail and the invoices will not be paid.

The effects of late payment

The strain on a small business caused by late payment can be disastrous. A Government survey conducted in 2013 estimated that a staggering 4,800 firms closed for business in the previous 12 month period as a direct result of not being paid on time. Late payment is not just commercially wrong, it’s also ethically wrong. When public sector organisations and large companies fail to pay on time, small businesses inevitably go out of business as a result, costing tens of thousands of jobs every year.

Even if a small business manages to survive the culture of late payment the effects can be severe. The new figures point to four main problems experienced by small firms:

  1. Preventing business growth
  2. The need for external finance
  3. Inability to pay staff on time
  4. Inability to pay suppliers on time

When faced with these problems many small business owners and managers will be demoralised and lack commitment, often choosing to close for business rather than struggle to make a profit. Many will come to the conclusion that if being paid for the goods or services they supply is so difficult and stressful, what is the point in being in business.

So what can you do to protect your business against the scourge of late payment?

Firstly and most importantly ensure your customers understand when payment is due and when payment becomes overdue. Don’t rely on verbal agreements, have clear payment terms included in your Terms and Conditions of Business and have new and existing customers sign them. Include information on statutory late payment compensation and interest, and don’t be afraid to apply these charges to customers who do not pay on time.

When you issue invoices include the payment due date and state late payment charges will apply from this date. Send a monthly statement 7 days before the due date and again state late payment charges will apply from the payment due date.

 

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