Eighty five per cent of small businesses say that they have experienced late payment in the last two years, and in total, UK’s SMEs are owed almost £40bn.
Evidence from the Federation of Small Businesses indicates that the average payment takes 58 days and that more than 50 per cent of businesses struggle with larger companies that fail to pay them promptly.
When an SME is faced with late or unpaid invoices, it can often be difficult to continue trading effectively, and the quality of output can suffer. But not only do late payments put a strain on the business itself, with SMEs making up 99.9 per cent of all private sector businesses, it can also limit economic growth.
Changing payment terms
One of the most common problems that SMEs encounter is an unexpected or sudden change of payment term.
In recent years, it’s been known for businesses to suddenly extend payment terms dramatically in order to postpone paying out for the commodities they’ve utilised. This has left some suppliers waiting up to 180 days to receive the money they’re owed.
Likewise, some businesses actively urge their suppliers to choose between a prompt payment in exchange for a discounted rate, or face a much longer wait for their payment.
Responsible payment culture
In order to build a more responsible payment culture, the government set out several penalties for those who pay late back in March 2013.
These penalties allow businesses to charge either a statutory interest rate or a fixed charge of £40, £70 or £100 depending on the size of the debt. This may be accompanied by a charge for any additional reasonable costs incurred.
However, although this option is available, when faced with late payments from regular or significant customers, suppliers can find themselves with their hands tied. Current data shows that only 10 per cent of businesses actually make use of the legislation available to them and many are reluctant to risk damaging their relationships with customers that they rely on.
Harnessing the power of CSR
Companies pay late for a variety of reasons. Particularly since the financial crisis, many firms have extended their payment terms in order to retain greater control over their cash flow.
However, in recent years, corporate social responsibility (CSR) has been gaining significance within the business world. This is particularly true for large businesses, which are becoming increasingly obliged to implement strategic CSR in order to reap the business benefits, such as strengthened corporate and brand reputations and enhanced trust with key stakeholders.
As the ‘lifeblood of the UK economy’, the success of small and medium-sized businesses directly impacts the economy. In order for SMEs to thrive and create new jobs, they need the support of businesses further up the ladder.
In addition, without small enterprises, larger companies would have to fight much harder to get their hands on the products or services they require to function efficiently and maintain their success.
While CSR is voluntary and the law is not involved, it can often form an integral part of a business. In some cases, it can even influence the decisions of potential customers in whether to work with the business or not.
While it can often seem to small businesses that their larger counterparts are untouchable, the UK’s biggest businesses need to give consideration to the damage their actions could do to their own reputation.
Over to you
When tackling late or unpaid invoices, small businesses can start to feel the pressure in the form of a stuttering cash flow. For many, the key lies in freeing up cash wherever possible – whether that be through a loan or invoice finance solution – in order to continue to grow and thrive.
Aldermore Bank is a specialist provide of small business finance in the UK. For more information about how to get cash flowing through your business, please don’t hesitate to get in touch.
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