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Late payments for small businesses hit two-year high

Author: ICAEW Insights

Published: 03 Nov 2022

Research findings prompt calls for tougher penalties to ensure businesses are paid on time so they can manage their cash flow and handle rising costs.

Late payments to UK small businesses rose again in September, new research shows. It comes at a critical time for companies as they struggle with rising input costs and households tightening their belts due to soaring living costs.

Payments to small businesses were made on average 8.2 days late in September, the highest late payment time since August 2020, according to the latest data from global small business platform Xero. In the UK, invoices were paid significantly later than they are in Australia (6.5 days) and New Zealand (6.2 days).

To curb the problem, Xero is calling for tougher penalties for big businesses that flout agreed payment terms, and new policies that require greater transparency in regulation and reporting on late payments.

Alex von Schirmeister, UK Managing Director, Xero, says: “The reversal of the tax measures announced in the last government’s mini-budget has left small businesses in limbo at a time when they need stability. It’s critical that they are paid on time so they can manage their cash flow and handle rising costs. We urge our new government to ensure that hard-working owners of these small businesses are protected.”

When stripping out the price impact using the ONS Consumer Price Index (CPIH) of 8.8% year on year, sales volumes fell by 5.2% as the rising cost of living continues to impact families and businesses in the UK.

However, Liz Barclay, Small Business Commissioner, questions whether new legislation would fix the problem of late payments in the immediate term, given the lengthy nature of creating new laws.

Moreover, such legislation would need to be enforced and there simply aren’t enough resources to police it given there are 5.6 million companies in the UK, Barclay says.

“As the cost of doing business escalates, companies waiting for payments to come in will delay paying companies they owe money to, to try to stay afloat,” she says. “Legislation to speed up payments, if it was decided that’s what’s required, would take time to progress through the legislative process.”

Instead, she says the focus should be on better relationship management between big business and its suppliers, and ethical leadership at the top of big companies. “We need companies to understand now that if they don’t pay faster their suppliers will have gone to the wall, leaving them in danger of going to the wall themselves as they struggle to find new suppliers,” Barclay says.

Although technological advances have meant payment times have fallen significantly in the past 10 years, when it took around 82 days to pay, “currently we’re seeing companies paying a little later and offering longer payment terms to conserve cash”, says Barclays. 

As well as big businesses acting more ethically in paying suppliers faster, small companies need to harness the technology available and tighten their invoicing processes, she says.

They also do not have to accept the standard 30-day payment term and can negotiate to tighten terms. 

“Many small suppliers feel they have no choice but to accept poorer payment terms or lose the work, but then face running out of cash while they wait and struggle to find other sources of working capital to tide them over,” she says. “The predicted perfect storm has arrived for many.”

Simon Gray, Head of Business, ICAEW says: “Economic uncertainty has increased focus on security of supply chains and the need to maintain adequate working capital arrangements. While it’s disappointing to hear that payment days have slipped in September, in advance of new legislation there are things that businesses can do, such as negotiation at the outset and ensuring any variance to standard terms is agreed and documented upfront.” 

Relationship management via the telephone is also a tried and tested method to ensure invoices are paid on time, says Gray. “While technology plays a hugely important role in prompter payment, picking up the phone and speaking directly to customers is good practice, particularly if there is a decision to be made on who gets paid first and when. 

“With many larger organisations reviewing supply chains and requiring increased flexibility in times of uncertainty, smaller businesses may be in a much stronger position to negotiate than has previously been the case.”

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