Small companies, or SMEs, accounted for more than 99% of the private sector last year in the UK. They also employ nearly 16m people, making them the bedrock of the UK economy. But there appears to be a problem holding these SMEs back, the late payments culture.
In a survey undertaken in April 2017, 1,000 SME owners and decision makers were questioned.The results showed that SMEs owed more than £44.5bn in late payments. Envisaging that the issue is on a large scale. This culture of late payments can be damaging to productivity, growth and can even lead to business failure.
Below are five things that are worth knowing about late payments.
- Why is there a late payments culture?
When a large business delays payments, a cash flow benefit is encountered. This is nothing to do with wanting to be slow. Instead, it can be that many large companies pay late or insist on 60-day terms. As big businesses have elaborate systems to navigate. It can also be a hard cycle to break for both the supplier and client. As a firm that is paid late may become a late payer as a result. This won’t be a problem for a large business but it can cause major issues for a small business.
- Can a law change this?
Well, not really. The issue relies more on the government and how they could promote best practise examples. However, formulating a satisfactory regime would be difficult at this point. As it would mean adequate resources and investment would be needed to monitor the problem and take action. There may also be a fear for small firms of losing business if they decided to lodge complaints against slow-paying large customers.
- How can the business sector and government be encouraged to stop late payments?
A solution may be to have an accreditation that is similar to the International Organisation for Standardisation (ISO) of quality measures. This may pressure bosses to give evidence that they have paid small businesses on time. Another part of the measure could be feedback being given anonymously from small companies. Then prompt payments would be ensured if they were focused on by internal compliance departments.
- Why is the late payments culture so rife with small businesses and why does it have such a damaging effect on them?
For a small business being paid on time is critical, especially in the first few years. An SME also does not have the same resources as a large company to fall back on when there’s a problem with payment. Small firms would have protective processes already in place but they may fear using them in the fear of harming existing relationships.
- So, what can a small business do to protect themselves?
An efficient payment management system can be implemented by a small firm. This can help to monitor payments, send reminder letters and have deadlines in place for when the process is escalated. It isn’t necessary to hire a financial controller to do this, as it can now be delivered by online tools. This is an effective method that can not only get rid of the fear of losing business but it can also ensure payments are made on time.