Late payments hit three-year high for small businesses

Late payments to small businesses have hit a three-year high, with industry leaders calling on the Chancellor and big businesses to do more to help.

Small businesses waited an average of 29.4 days to be paid by their customers in the three months to September, according to Xero’s quarterly small business index. This was 0.5 days longer than the average across the first half of the year.

In September, small firms were typically paid 7.7 days after the payment was due. 

This marks the highest level in three years and is putting already struggling small firms on the brink.

Adam Cozens (pictured) says late payments will affect cash flow this festive period

Adam Cozens, co-founder of small business Perky Blenders said: ‘As a wholesale coffee retailer, late payments and broader cash flow issues significantly impact how we manage stock levels. 

‘This really affects our ability to meet demand over busy periods, which is particularly worrying ahead of the festive season, when demand for online gift subscriptions will peak.

‘If we are hit by late payments earlier in the year, we can’t afford to bulk order in October. This hugely limits sales and growth during our most important sales period.’

The data shows that September’s late payment figures bring the thee-month average to 7.1 days late, higher than the 6.4 days reported in the first half of 2023.

>  How to deal with late payments 

Small firms in the manufacturing sector have been the worst affected, with payments made 10.1 days late on average.

Ben Day, owner of BW Day Metalwork said: ‘Late payments completely disrupt my business and personal life. 

‘As a relatively new business, I don’t have a big savings safety net and faced significant upfront costs when setting up my workshop. So, when a customer doesn’t pay me on time, it has a direct impact on my personal finances.

‘To maintain my relationship with key suppliers, I have often had to cover the cost with my personal credit card while waiting for a client payment. I’ve also had to ask for grace periods, which makes my business feel and appear less professional.’

The definition of prompt payment for a small business suppliers, as per the Prompt Payment Code (PPC), is to pay 95 per cent of invoices from small businesses with fewer than 50 employees within 30 days.

However, the code is voluntary and research by the Federation of Small Businesses (FSB) found that in every quarter in 2022, most small businesses experienced late payments.

The Government has launched a review into enforcing late payment rules, but small firms are routinely forced to chase missing cash from businesses they supply.

In response to Xero’s findings, a spokesperson for the Department for Business and Trade said: ‘Small business want big business to be more transparent around retentions, as late and non-payments cause issues and direct supply chains.

‘Following our consultation, we are considering reporting requirements to help small businesses make more informed decisions that will give them the stability they need.’

Rushanara Ali MP, shadow small business minister told This Is Money:  ‘Countless small businesses are being held back by a culture that says it’s acceptable to pay them late. 

‘But despite years of campaigning from small businesses, and the first consultation over eight years ago the Tories have failed to legislate to make boards more accountable.

‘Labour knows small businesses are vital for our economy, that’s why we have set out how we would legislate to tackle late payments; requiring big businesses to report on their company’s payment practices in their annual reports.’ 

Late payments are pushing small businesses already suffering with rising costs to the brink

Do more to help small firms, say industry leaders

The issue of businesses being paid late has ‘spiralled out of control’ according to the Federation of Small Businesses (FSB) trade body, and is stretching firms to their limits.

FSB research has found that if late payments had been made on time, 50,000 business closures could be avoided each year.

National chair Martin McTague has called on the Government to do more to help small businesses with late payments in next month’s Autumn Statement.

‘Announcements in October about prompt payment reforms are a step in the right direction,’ he said. ‘Requiring more detail to be provided as part of payment performance is good, but this must be followed up with more powers to investigate and prevent poor payment practices.

‘These should be the first steps towards sweeping reforms. Get it right, and we unlock a monumental £2.5billion into the economy each year.

‘Going further, the Chancellor needs to take a strong stand against late payments at the upcoming Autumn Statement by making it clear that late payment will not be tolerated.

‘It’s time to send a powerful message to big businesses who use small ones to prop up their cash flow.’

A recent ​​survey commissioned by the UK’s largest accountancy bodies – the Association of Accounting Technicians and the Association of Chartered Certified Accountants – found that MPs want more powers to be handed to the Small Business Commissioner (SBC).

This body was introduced in 2016 to tackle unpaid invoices, and the Government is currently reviewing its role and effectiveness.

The current commissioner Liz Barclay told This Is Money: ‘No business should be paid late. All firms, and in particular small firms, need certainty about when money will reach their bank account. 

‘However, when times are economically difficult firms preserve cash, either through offering suppliers longer contractual payment terms or by paying after the due date of invoices.

‘These poor payment practices are to the detriment of every business in the supply chain. Pay quick and don’t expect suppliers to bankroll your business.’

This post first appeared on Dailymail.co.uk