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The impact of late payments on small businesses

Author: ICAEW Insights

Published: 10 Oct 2022

New research shows that half of invoices issued by small businesses are paid late. Could stricter penalties and more transparency in regulation and reporting make a difference?

Small businesses have long suffered from suppliers paying them late, but mounting economic challenges including rising inflation and the falling value of the pound are only serving to aggravate the problem. Late payments cost small business owners £684m a year, with most receiving payment 5.8 days late on average, new research shows.

Using analysis from thousands of businesses based on revenue and expenses data, analysis by business software platform Xero reveals around half of invoices issued by small businesses were paid late, with 12% paid more than a month after they were due.

Just as worryingly, Xero Director of Operations (UK and EMEA) Kate Hayward warns that there is no easy solution to solving the late payments crisis. “It’s become so deep-rooted in the behaviour of big businesses that it’s extremely difficult to address,” she says.

Hayward also warns that the term ‘late payments’ does not capture the severity and urgency required to inspire action from the worst offenders, typically large businesses using smaller suppliers.

“Renaming late payments as ‘unapproved debt’ would be a strong starting point to move away from language that legitimises a poor practice that does untold damage to small businesses,” Hayward says. Xero’s study found that 81% of large organisations would be more likely to pay their suppliers in a timely fashion if this terminology was more widely adopted.

The Late Payment of Commercial Debts (Interest) Act was enacted nearly a quarter of a century ago, coming into force on 1 November 1998. It allows creditors to charge interest at 8% over the base rate for late payment, compensation and reasonable costs of collecting the debt.

Hayward says: “Different governments have promised to clamp down on late payments for years. But our study found that 55% of large organisations admit they have paid their small business suppliers later than the agreed payment terms in the last 12 months, despite more than three in four saying they are aware of the impact this could have on the supplier’s business.

“The current mechanisms clearly aren’t strong enough to deter larger organisations from mistreating suppliers, many of which aren’t able to risk losing their custom. Stricter penalties for those ignoring agreed payment terms, in addition to more transparency in regulation and reporting, are now vital to support small businesses across the country.

“While Liz Truss’s government is faced with many challenges, it can’t ignore the issue of late payments – particularly with the cost-of-living crisis looming large, which is set to have a huge impact on our small businesses.”

Simon Gray, ICAEW’s Head of Business, says the multitude of pressures impacting smaller businesses, including inflation and energy price increases, means that they are less equipped than large organisations to weather the storm.

Gray says encouraging prompt payment has never been more important. “Late payments remain a challenge for small businesses, which rely on prompt payment to manage cash flow and working capital requirements.”

Amanda Walls, Founder and Director of Manchester-based digital agency Cedarwood Digital, says for small businesses there is little to no protection from late payments. “Late payments can have a substantial knock-on effect to that business paying staff, tax and its own overheads and there are little to no rights for small businesses, particularly against larger corporations. As a small business owner, I believe the government should be doing more to protect us from late payments and improving our rights around this.”

Walls says penalties should be placed on businesses for repeated late payments. “Businesses have the ability to understand their payment terms when they sign a contract and should have the respect to adhere to these,” she says.

Hayward suggests there are more immediate, tangible changes that the government could do to tackle the issue, such as legislating for large businesses to report on how much of this unapproved debt they are using to finance their operations as part of annual reports or ESG/CSR programmes.

“This would hopefully lead to a world in which great workplaces are partly defined by how the company in question treats its supply chain – payment practices are absolutely part of this,” Hayward says.

Xero has also published a new report to help small businesses identify cash flow red flags. It recommends that small companies consider online invoice payment options for faster payment. 

Many small businesses are moving to digital services to tackle late payments issues, and it’s clear that this solution can ease the process. But the government needs to act too.

Alex Robinson, Managing Director, Novus Digital, says: “Most of our income is through monthly retainers. Over our three years of business, we’re constantly owed thousands in overdue invoices – some of which we’ve been forced to write off in bad debt. To counteract this, we’ve moved all new clients onto direct debit payments.”

Accountants can play a vital role in helping small business owners identify the right amount to raise prices and ensure a balance between profitability and customer retention, as well as making clients aware of digital and cloud accountancy tools available.

Hayward says: “As automation becomes more accessible to small businesses, it can also play a role by helping them automatically chase those that owe payments. That leaves owners free to devote their attention to running their business and looking after their employees.”

Gray says that although investment in automation can help, traditional relationship management is still important. Picking up the phone before payment is due could be the nudge needed to ensure your business is on the payment run.

“Organisations large and small have been facing supply chain challenges, which has prompted many organisations to review the security and robustness of existing supply chains,” Gray adds. “Smaller businesses that can offer flexibility and respond quickly to the needs of larger organisations are more important than ever.”

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