High inflation and energy costs have grabbed headlines in recent months, but there’s another issue small businesses are quietly battling – late payments.
The issue of businesses being paid late has ‘spiralled out of control’ according to the Federation of Small Businesses (FSB) trade body, and are 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.
While the Government has launched a review into enforcing payment rules, small firms are routinely forced to chase missing cash from businesses they supply.
Late payments can cause cash flow issues and stretch small businesses to their limit
This frequently leads to cash flow problems and puts livelihoods at risk.
Now a new YouGov survey shows most MPs want tougher measures to crack down on late payments.
We look at how late payments are affecting small firms and what measures might be introduced to help them.
‘I helped a company float on the FTSE then had to beg them for £60,000’
A late payment can be make or break for a small business. Polly Arrowsmith recalls that when she ran an IT-managed hosting business she often had to chase large brand names for payments.
One client in particular, which Arrowsmith had helped to float on the FTSE 250 by building their data centre, refused to pay an invoice which was worth more than £60,000.
‘My major supplier had given me a noon deadline to pay their invoice, or they would just cut off our services and our company would go under,’ she said.
‘I begged for the invoice to be paid, it was very stressful. At 11.57am they paid us. I had been gearing up to tell all of my staff they were out of a job, and the client that we had failed.’
Sophie Wright, founder of consultancy WrightCFO, has also found that large companies are the worst offenders. Her consultancy engages contractors before placing them in businesses.
She has primarily worked with start-ups or SMEs and, for nine years, has never had to write off a debt.
But that was before she brought on a international company which started paying later and later, until they were a few months behind.
‘Finally they just stopped paying,’ Wright said. ‘They have gone into liquidation and owe me two-and-a-half months of invoices. The consultant needed paying and I was obliged to pay but couldn’t afford to front the full cost myself. I have had to start a payment plan to pay her.’
Sophie has since changed her contracts with consultants to say they can only get paid if the client pays. ‘I am weary of taking on very large clients going forward,’ she added.
What is the Government doing to help?
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 FSB research found that in every quarter in 2022, most small businesses experienced late payments.
I begged for the invoice to be paid… I had been gearing up to tell all of my staff they were out of a job and the client that we had failed.
A YouGov survey commissioned by the UK’s largest accountancy bodies – the Association of Accounting Technicians and the Association of Chartered Accountants – recently found that two-thirds of MPs think the PPC should be made compulsory for organisations with over 250 employees.
There is also appetite among MPs for 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.
More than half of MPs agree that the SBC should be able to impose financial penalties for persistent non-compliance with the PPC.
The Government already announced a review into late payments – looking specifically at the PPC and SBC – last December, in a bid to prevent smaller firms being ripped off by bigger companies.
The Procurement Bill, which sets out a requirement for 30-day payment terms to apply in public sector supply chains, is already in its final stages.
The business and trade department said its review would specifically look at the current payment reporting regulations and the PPC.
A spokesperson for the business department said: ‘Our Payment and Cash Flow review has been scrutinising existing payment practices, the PPC, and other measures in place to make sure small firms are fairly treated by their larger clients.’
Seema Malhotra, Labour’s shadow small business minister, told This Is Money the Government isn’t doing enough, however.
Malhotra said: ‘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.’
Small business owners are more sceptical about whether anything can really be done about late payments.
‘I don’t think it’s possible to actually legislate late payments,’ says Arrowsmith. ‘If you choose to work with the big telecoms and media groups then you accept late payments.
‘I had a large media company not pay for a £23,000 project. They didn’t care that we went to small claims court and got a judgment. To them, they were and still remain a billion-pound company.’
How to deal with late payments
Chasing after late payments can be stressful and time consuming, but is an all-too-common occurrence.
The first step is to have a system in place to deal with late payments as quickly and easily as possible. The best thing to do is to contact the customer before the payment is due to avoid you chasing debt, but if it has not arrived then you should make immediate contact.
If a customer is persistently late, the FSB suggests you consider whether you’re prepared to continue supply on credit terms. It might be better to lose the order, or customer, than supply the goods and not get paid.
Even with systems in place, some businesses will fail to pay on time. It means you will have to consider your cash flow and ask if you have sufficient funds to meet any commitments you have.
The FSB has an in-depth guide on how to deal with recurring late payments here.
Had trouble with late payments from a big company?
Email [email protected] with LATE PAYMENTS in the subject line
