Taking on the Challenge of Late Payments

Recent events have highlighted how exposed suppliers can be when an important customer is unable to make payments. Small to medium enterprises are crucial to the UK’s economic stability, but poor payment behaviour and reliance on a small number of large customers can cause significant challenges.

A recent survey conducted by Dun & Bradstreet and the Small Business Research Centre uncovered alarming statistics on how late payments are impacting UK SMEs. Of the 500 managers and small business owners we spoke to, 58% said late payments are putting their companies at risk of outright failure. In fact, SME respondents were owed an average of an average of £64,000 in late payments, with 11% owed between £100,000 and £250,000 in unpaid receipts at any given time, highlighting the reveal the scope of the problem.

Small businesses are particularly vulnerable to cash flow concerns, with 26% citing timely payments as the most important factor to the financial success of their companies. This is understandable, as it can be challenging for SMEs to secure short-term loans from banks and other traditional lending institutions.

When an invoice is left unpaid, wages, rent, and other immediate expenses may be put at risk. Over the long term, late payments can starve SMEs of the capital they need to take profits and grow their businesses. Perhaps more disturbing, 15% of small business owners admitted to dipping into their personal savings to cover gaps due to late payments from customers. While this determination and sacrifice is admirable, it’s not a sustainable strategy.

Numerous explanations have been put forth to explain why a culture of late payments has flourished in the UK. Customers could be withholding money until goods arrive, regardless of the invoice terms. Some businesses are probably struggling to collect from their own clients. Finally, weak enforcement of payment terms leaves little incentive for debtors to meet their obligations on time — especially if they think the vendor needs their business. Suppliers can charge interest on outstanding debts but may resist this move for fear of damaging a potentially lucrative relationship with a customer.

While few doubt the scope of the problem, our survey found significant differences in payment behaviors by industry. For example, manufacturers reported being owed an average of £83,000, putting them at the top of the list. The education sector fared best with £49,000 outstanding — hardly a reassuring figure. Regardless of the nature of the business, just over half of SME owners said the situation has worsened over the past three years.

Steps are being taken to try and address the issue.  More than 1,800 companies have signed up to the voluntary Prompt Payment Code, committing to 60-day payment periods, with the goal of cutting that time in half. The new Duty to Report statute requires large businesses to disclose their payment practices on a quarterly basis, with the aim that full transparency will encourage better behaviour. In the Spring Statement, the UK Government also outlined their intention to introduce tougher measures to tackle late payments and have since announced proposals to prevent known late payers from bidding on public sector contractors. In addition to Government intervention, there are also several actions SMEs can take themselves to help mitigate the risk of late payments on the future success of their business.

First, businesses should undertake due diligence when onboarding any new customers. Our survey revealed that 36% of SMEs don’t run business credit checks on potential customers. This means a considerable number of engagements begin on trust alone. Even if a business is hard-pressed to turn down new clients, the insights that come from company credit reports can help keep the number of high- and low-risk customers in balance.

Small business owners can also explore alternative lending arrangements with financial institutions. As the issue of late payments gains urgency, more lenders are willing to extend limited funds to compensate for delays. Single-invoice financing can also provide a back-up option to aid cash flow.

Finally, SMEs can actively monitor the financial health of their existing customers. Where credit checks take place, it is normally only for new customers. The real risk however is when goods and services are provided on credit terms. Business credit scores, ratings and payment behaviour change. Tracking the ongoing performance of existing customers, and acting when this behaviour changes therefore, can be the difference between being paid first and paid last – and make a real difference to a business’ financial health.

The reality is that even with the renewed Government commitment, late payments will continue to be an issue for small businesses in the short to medium term. At a time when SMEs are facing numerous external challenges, late payments pose a real threat to the vital role small businesses play in the UK economy.

Read the full report: The challenges and prospects for UK SMEs