Late payment culture in the UK has been a trending topic recently due to the government’s recent efforts to combat the issue that has for too long been plaguing small businesses across the country, with unpaid bills currently in the millions of pounds.
Emma Jones, MBE, the founder of Enterprise Nation, has stated:
We’re delighted the government has taken this step to ensure they are setting the right example in paying within five days and further enforcing the prompt payment of invoices for SMEs.
There is absolutely no doubt that late payment, often 60 days and even beyond, has a dramatic and disproportionate effect on smaller firms, which often rely on cashflow to fund trade and avoid unnecessary debt. The continued attention on the issue of late payment should enable UK enterprise to further flourish.
According to the latest research carried out by the Federation of Small Businesses, a quarter of UK businesses report late payments as being a threat to their survival. Tackling the late payment culture in the UK would be a huge opportunity not just for the small businesses directly affected but for the economy as a whole, as it could potentially add £2.5 billion to the UK economy and keep an extra 50,000 businesses open each year.
The Federation of Small Businesses (FSB) National Chairman, Mike Cherry, has commented:
Late payment is the biggest challenge affecting small businesses and it is good to see the government getting serious about this issue, especially when it comes to large firms paying their supply chains promptly.
“Late payment” specifically refers to when a business has been supplied goods or services but has yet to pay for the goods or services received within the agreed time period. If payment terms were never explicitly agreed upon, then legally it is assumed that payment is due after 30 days.
Late payments can set off a chain reaction as companies who are paid late may then become a late payer themselves as a direct result. Breaking this cycle that has already become so ingrained in the UK’s business culture will be difficult. To use an analogy, the problem is similar to unexpected traffic jams that seemingly come out of nowhere. Where if one vehicle slows down for whatever reason, then this causes the vehicle behind it to react slowing down even further, affecting the vehicle behind that, and so on. This can cause an entire chain of vehicles slowing down to the point where the vehicle at the very end may eventually be forced to come to a complete halt as the jam moves backwards. For those at the tail-end several miles behind, there may be no visible cause as to why they are delayed. If all vehicles travelled consistently at the same speed then this would significantly reduce congestion.
Large companies are able to absorb these costs temporarily until the pending payments have been made, but persistent late payments are enough to put many small companies out of business. It has been said that some larger companies may be intentionally using late payments to exert control over the smaller businesses in their supply chain, even holding some payments to ransom. Others are slow to pay due to prioritising their monthly invoices by urgency, seeing how long they can get away without paying before they have to suffer any consequences.
Late payments can be a heavy financial burden for small companies who rely on steady incomings and outgoings to budget accordingly, as they lack the resources to keep their head above water when money isn’t coming in as expected. With payments coming in and going out as they should, small companies can be better prepared financially and focus on their own growth and innovation without worry.
In December 2017, the Office of the Small Business Commissioner was set up with the goal of helping small companies (with less than 50 employees) to ensure their fair payments so that they can stay afloat. The organisation has so far secured £500,000 for SMEs.
Oliver Dowden, the Cabinet Office Minister for Implementation, has said:
We expect the highest payment standards from both government and big business.
That is why we will commit to central government aiming to pay 90% of undisputed invoices from small and medium-sized businesses with 5 days. Small firms can also report poor payment practices via our Mystery Shopper service, which ensures their voices are heard.
We are listening to businesses and going more than ever to level the playing field for small businesses to win work in the public sector.
Solutions to end the UK’s late payment culture include naming and shaming repeat offenders —particularly the big businesses who are more likely to “throw their weight around”— as a deterrent. Others have proposed fintech solutions, to ensure seamless payments can be made on time between companies.