Challenges around terminology and data make assessing the current state of late payments in the UK far from straightforward. For Matthew Davies, Director of Commercial Finance at banking trade body UK Finance, the issue is best addressed under the broader umbrella heading ‘poor payment practices’ rather than dwelling on the narrow and ambiguous label ‘late payments’.

“A payment is only late if it’s outside terms,” Davies says. “So, if an SME has contracted with a large client to a term of 120 days, and the client pays on day 119, that’s technically on time. But it can still impact the SME’s cash flow.”

Poor payment practices include clients imposing unreasonably long terms – plus formal late payment outside terms, seeking retrospective discounts or imposing onerous contractual stipulations. 

“For example, some large buyers may seek to impose wording designed to limit assignment of the payments due under the contract, as well as pay-when-paid and unlimited liquidated damages clauses. 

“The effects could include limiting a small supplier’s ability to access external finance to support their working capital. Combined with long payment times, those sorts of measures can really go to the heart of the balance of power in a contractual relationship,” Davies explains.

Fragmentary system

UK Small Business Commissioner (SBC) Liz Barclay shares Davies’s concerns, and highlights the lack of a properly centralised, national dataset for poor practices that would give stakeholders a clearer picture.

“I keep asking the questions: what are we measuring, and who’s measuring it?” Barclay says. “Right now, we have a fragmentary system made of pockets of data. The cloud accounting software providers are measuring payment times for their clients – but that’s different to information that the Department for Business and Trade (DBT) gets from payment reporting data, in which large companies set out their payment performance.”

Davies voices similar concerns: “We have some data reported to us by our invoice finance and asset-based lending members. But businesses that use those products will already have a certain amount of discipline around invoicing and credit control – so their experiences may not represent those of companies at a wider level.”

Barclay cites recent research from Smart Data Foundry, a wholly owned subsidiary of the University of Edinburgh, showing that over the past decade the average time to payment has dropped from 82 days to 36. Meanwhile, UK Finance’s dataset for businesses supported by its members indicates a current, average duration of 48.5 days – down from around 55 before the dawn of the pandemic.

For Barclay, though, it all comes down to fundamentals. “We need a good body of solid evidence to work out which problems we’re trying to solve,” she says. “And then we need to define what we mean, because if we’re not measuring the same things consistently, the data isn’t interoperable.”

Confidence to invest

In November 2021, DBT launched a call for evidence on the effectiveness of the current payment practices reporting scheme, the result of which fed into a report published in April last year. Earlier this year, a further consultation on those rules was announced alongside a statutory review of the Office of the SBC, both of which closed on 28 April.

The question of whether the current legal regime around payment practices should be tightened is key to both. However, Davies remains unconvinced that any dramatic changes, not least prescriptive rules around maximum payment times, will emerge as a result. “Without more definitive data, it’s clear that arguments citing such rules as undue restrictions on freedom of contract would just be too loud,” he says.

Davies takes the pragmatic view that the more qualitative, rather than quantitative, approach that has typified the SBC’s work over the past few years – based on nudges, calling out poor behaviours and highlighting exemplars – is the right way to go.

Barclay, too, acknowledges that “soft tools”, rather than stricter laws, could be used much more effectively – and she and Davies share the view that further statutory support for good practices could come from the environmental, social and governance (ESG) agenda.

“If small suppliers were getting paid faster and had more confidence to invest, digital transformation and net-zero goals would be higher on their list of priorities. So, from a governance perspective, if directors of larger companies were required to examine how well they treat their suppliers, there would be a much greater emphasis on payment performance as a metric of how responsible a company they are running,” Barclay says.

One suggestion put forward by UK Finance is to look at tweaking the reporting rules to introduce a requirement for companies to provide further commentary on their payment practices. “So, in a company’s report, there could be more detail required on treatment of suppliers, in addition to other ESG data,” Davies says.

Payments hygiene

There is also much small businesses could do to get paid quicker, and better communication between both sides is essential, Barclay says. “Get to know your main points of contact in your clients’ payment departments and foster great relationships with them.”

At the same time, good payments hygiene and rigorous process efficiency is key: Barclay says research shows that an appallingly high proportion of invoices are submitted with errors on them, requiring them to be resubmitted, thereby delaying payment. “And of those, many aren’t chased up and are therefore never paid. That’s likely to have improved with the use of technology – but small businesses must ensure that they are paid everything they’re owed, or their viability is threatened.”

Davies adds: “Invoice regularly – and if your clients have particular invoicing requirements and processes, make sure you do all you can to comply with them and respond to any queries quickly so there’s no excuse for delays. There are also finance options such as invoice financing that can help smooth cash flow.”

The onus is also on larger companies to do their bit as good payers, Barclay notes: “It’s ethical and responsible, and enhances your reputation for being good to work with, work for and invest in. And frankly, it costs a lot of money to look for new suppliers. In the pandemic, many businesses came to realise that if even their smallest small suppliers folded, or went over to the competition, they weren’t going to have goods to sell to their own customers.”

Davies adds: “All businesses benefit from strong, safe and stable supply chains. Treating the businesses that support yours fairly – and ensuring they're around tomorrow, and the next day, to help you to continue to trade – is surely in everyone’s interests.”

ICAEW Head of Corporate Finance David Petrie says: “Modern supply chains are comprised of often extremely complex relationships between businesses, which encompass more than simply the length of time it takes a client to pay a supplier. In that context, ICAEW members, in their capacity as finance directors or CFOs, are ultimately responsible for setting payment policy – and that is typically a matter for commercial negotiations.”

While using payments data to create industry league tables of exemplars could be effective for driving compliance, they would not be a panacea – and, in some sectors, could be seen as anti-competitive, Petrie warns. They may also serve to exclude young, smaller businesses that are still finding their feet. 

“Looking at this from the perspective of the ‘S’ in ESG, businesses that take time to understand their supply chains, improve relationships within them and know and care about their suppliers will benefit society as a whole,” Petrie says.

• Read ICAEW’s full responses to the consultation on the UK’s payment practices reporting scheme and the statutory review of the SBC.