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New decade needs new payment culture

With late payments growing to £23bn last year, Rachel Underhill, Business Strategy Manager at ICAEW, urges London companies to start the 2020s with a clear culture on payments.

February 2020

Payment culture is something that should be of particular priority for London. The city has the highest ratio of SMEs according to the Department for Business, Energy & Industrial Strategy figures. At 1,563 small businesses for every 10,000 adult residents, that equates to more than one million SMEs across the capital.

If these SMEs employ just three people each, that is nearly 50% of the adult population in London, and the health of these London SMEs is very much linked to the health and balance of the London economy.

Payment issues were one of the biggest concerns for many of the SMEs I visited in 2019. From all corners of the UK, reports were coming through of pressure to extend payment terms or simply blind ignorance of the agreed payment dates.

But despite rising awareness of the problem due to the good work of the Office of the Small Business Commissioner, debts due from late payments grew by over £10bn to £23.4 billion in the last year according to Pay.UK. They also reported that 78% of SMEs are being forced to wait a month beyond the agreed payment terms; meaning over three quarters of SMEs are spending time and money on chasing payments rather than on their business.

And not only are SMEs facing late payments, they are also facing longer payment terms. As ICAEW member Jon Scopes, strategy consultant in the SME sector, recently said to me: “I’d rather have a 30-day account that pays two weeks late than a 120 day account that pays on time.”

In this regard, should we be focusing on the total time to pay, late or not? Who is the real culprit?

Excessively long payment terms are a problem when you consider how critical a matter of days can be for a start-up. Even the more established suppliers are not immune. I’ve heard of an instance where updated contracts were issued digitally, with a considerable lengthening of payment terms smuggled in. Luckily this business was eagle eyed enough to spot it, and strong enough to refuse.

To this end, we welcomed the wording in the recent Queen’s speech on this matter: “We will clamp down on late payment more broadly and strengthen the powers of the Small Business Commissioner to support small businesses that are exploited by their larger partners."

SMEs are seen as key facilitators of equal distribution of income and wealth; something that is keenly important when you look at regional imbalances even within London. If small businesses are spending resources chasing late payments or have long gaps between monies paid and received, they are not being productive and are not helping distribute wealth around the city.

In an uncertain global landscape, we need to look after our SMEs. In 2020, we will be encouraging all businesses to examine their payment culture. Excuses such as “We have always had 90-day payment terms” are just not going to be good enough.

Rachel Underhill is Business Strategy Manager at ICAEW

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