Last reviewed 13 August 2021

Late payment continues to be a chronic problem small enterprises face. As the business community looks forward to a post-pandemic trading landscape, we look at what practical steps can be taken to reduce instances of late payment.

For small enterprises, in particular, navigating the pandemic has been challenging to say the least. Ensuring a stable cashflow has always been a fundamental component onto which a sustainable and profitable business is built. But as we enter a post-Covid world, what does this mean for cashflow and will late payments continue, improve, or even erode further?

Reporting on the state of the small business landscape across Europe, the European Payment Report, 2021 from Intrum concludes that in the UK, 62% of respondents are more concerned than ever about debtors’ ability to pay on time, with nearly half (46%) stating they believe the widening gap between payment terms and duration of paying is a real risk to the sustainable growth of their businesses.

Interestingly, Intrum also point to how commercial partners have been using financing for their businesses could impact prompt payment over the next year: “Nearly a quarter of UK businesses (24%) cite an over-reliance on unsecured loans among their business partners as a major barrier to prompt payment over the next 12 months, versus 19% in Europe. A similar figure (26%) plans to secure payments from customers faster, in preparation for a downturn.”

Says Martin McTague, National Vice-Chair of the Federation of Small Businesses (FSB): “We shouldn’t have an environment where small firms’ cashflow suffers, endangering their survival, because their clients don’t pay promptly. Every small business deserves to be paid for good work in a timely way, with 30 days as the suggested ‘maximum’ embedded in both the Good Business Charter and Prompt Payment Code, without being charged fees.”

As you read this, the government has strengthened the existing Prompt Payment Code, which is underpinned by the Late Payment of Commercial Debts (Interest) Act 1998. The Code now requires signatories to pay 95% of their invoices from small businesses (with less than 50 employees) within 30 days. This is half the time previously allowed by the Code.

Commenting, Iain Wright, Director for Business and Industrial Strategy at ICAEW (Institute of Chartered Accountants in England and Wales), said the reform was “a big step in the right direction to help change attitudes towards late payments at a time when resources are tight for businesses of all sizes. Far from being a victimless act, the failure of large businesses to pay smaller suppliers promptly jeopardises the survival of many companies, putting at risk livelihoods and jobs.”

Taking action

Croner-i Business-inform spoke with Michael Green, Director of Partnerships at Xero UK and began by asking whether the late payment culture has improved?

“Despite steps to abolish the late payment culture, it’s still one of the biggest challenges facing small businesses today,” Green responded. “Our research shows that the pandemic has only made things worse. We found that 59% of small business owners said that bigger companies increased the length of their payment terms during the lockdowns. This creates a cashflow squeeze, which in turn impacts things like the ability to hire and retain staff.

Are owner managers still fighting chronic late payment?

“Xero’s Small Business Insights (SBI), our snapshot of the health of the UK’s small business sector, shows average payment times remain longer than pre-crisis levels. The impact that this can have on a business is huge.

“When speaking to some of our customers, we heard about one business being asked to drop their prices by 10% by one large business who also wanted to extend their payment terms to 90 days.”

Are there any practical steps that SMEs can take to reduce the instances of late payments?

“Ideally, negotiate shorter payment terms – so there is less of a chance of an invoice getting lost. It’s best to have these discussions and confirm payment terms as part of the initial agreement.

“Overcome politeness – Asking for money is awkward at the best of times. Don’t be afraid to ask for what you’re owed. When an invoice is overdue, send a reminder or make a phone call straight away. An accountant can often help with these uncomfortable conversations, or you can use technology to automate the chasing of invoices.

“Adopt the right technology to make keeping on top of finance simpler – Xero automates the process of chasing invoices, so you can track cash flow and invoice payments in real time.”

Is charging interest on late payments effective?

“After 30 days have passed from the date payment was due, you are legally allowed to charge statutory interest on top of the original invoiced amount. There might be hesitancy to do this amongst the small business community so as not to damage relationships.

“To put an end to late payment issues, there needs to be a cultural shift. That's why at Xero we are calling for 'a fair buyers bill' to prevent large firms increasing payment terms for their small business suppliers. We'd like to see the government set 30 days as standard payment terms for all businesses and ensure that big businesses pay their small business suppliers on time.”

Is it a myth that the larger the business, the later they will pay smaller enterprises?

“Unfortunately, there are some large businesses that will pay small companies later. Poor payment practices by corporates go beyond late payments, too. Xero's research has found that 37% of SMEs felt squeezed by corporates during the pandemic. Their bigger clients asked nearly three-fifths (59%) of SMEs to cut their fees and prices, and 40% feel that their bigger counterparts were asking them to do more for less money.

“However, it is promising to see that there are some larger businesses, who are taking action. Take Morrisons for example. In 2017 they announced that they’d be shortening payment terms for small suppliers to a maximum of 14 days. At Xero, we’ve committed to paying our small business suppliers within 10 days.”

Are the instances of late payments closely linked to poor terms and conditions and credit control?

“There will be cases when late payments are closely linked to poor terms and conditions and credit control. Our research showed that 49% of small businesses were asked to change their T&Cs by their larger clients during the pandemic. This goes back to ensuring you’ve got the right processes in place when engaging with a new partner, so there are no scary surprises.”

What is your view - what does the future of late payments look like as we move into a post-pandemic commercial landscape?

“The good news is that some steps have been made to hold businesses to account, and there is a progressive awakening as companies move to create policies on the environment, diversity and responsible business. The next to be added to this should be payment culture.

“This is where technology development will play a crucial role, in making it quicker to make payments and improve cash flow. At Xero, we are constantly developing our technology capabilities to tackle late payments. For example, last year, we launched Pay with Wise, a tool to enable businesses to seamlessly make payments to their suppliers.

“Tackling the issue of late payments is vital in enabling small businesses to reach their full productive potential and improve not only the growth of their business, but the growth of the UK economy at this critical time.”

Changing culture

Lawtech UK has also looked closely at how an online dispute resolution platform could reduce instances of late payment. Jenifer Swallow, Director of LawtechUK at Tech Nation, comments: “Small businesses are critical to our communities and economy. Late payments are a huge problem and the legal system should be there when they need it. It should not be slow, adversarial and hard to access. Our LawtechUK study shows that technology can address this problem. Disputes can be resolved quickly and easily, and in a way that maintains business relationships. Delivering this online platform can help make the pain around late payments a thing of the past for SMEs.”

With the FSB’s Martin McTague, concluding: “Small and medium-sized businesses will be vital to the post-pandemic economic recovery phase, as they account for three fifths of the employment and around half of turnover in the UK private sector. If their growth and survival prospects are hampered by poor payment practices, the negative consequences for the economy as a whole, will be huge – an entirely avoidable potential crisis. Our late payment crisis is longstanding and has been exacerbated by lockdowns. A strong economic recovery will hinge on ending it.”

As businesses assess how they will trade post-Covid, late payments won't be far from their minds. Improvements have been made, and with legislation in place, small business owners are not powerless to act. However, the culture of late payment continues for a wide range of reasons. Ultimately, settling debts on time should become part of every enterprise's automated processes and not a general afterthought.