Why are late payments to SMEs getting worse?

The Impact of Late Payments on UK SMEs

Small and medium-sized businesses are inherently more vulnerable to late payments than their larger counterparts. By their nature, these smaller organisations have a lower cash reserve and may be unable to continue trading if customers hold out. In fact, nearly half (48%) say late payments put their business at risk of failure, according to our report ‘UK SMEs: Brexit and Beyond’.

Late payments have been subject to greater media attention since 2017, with the Federation of Small Businesses campaigning to end the problem and the Chancellor of the Exchequer Philip Hammond announcing new measures targeting enterprises in the Spring Statement. But despite this focus, the problem is getting worse. In fact, the average SME is now owed £80,141, compared to £63,881 twelve months earlier.

Small and medium-sized businesses do not, however, have to wait for the government to take action. By using external data to explore the payment history of key – and prospective – customers, SMEs can take proactive steps to protect themselves. This blog post will explore the impact of late payments on SMEs – and point to the tactics that can be used to combat them, or watch our video below to learn more:


Late payments: a hidden crisis

The impact of late payments can be huge. When an SME doesn’t receive their fees on time, it can cause serious cash flow issues, which then have a knock-on effect for the rest of the enterprise’s operations.

Almost a third (31%) of the SMEs we spoke to reported experiencing cash flow issues as a direct result of late payments. A further 28% told us that receiving late payments forced them in turn to make late payments to their own suppliers. This can seriously erode the relationship between an SME and their supplier, adding a procurement problem to their existing burden.

It’s unsurprising that late payments cause such a big problem, given their size. Nearly a fifth (17%) of SMEs are owed between £100,000 and £500,000, while the average late payment in London amounts to £107,766. In 2017 it was reported that the average revenue for a UK small business was £90,000 – less than the average London late payment. In this scenario, it’s easy to see how SMEs find this a make-or-break issue.

The thing that’s most worrying is that the problem of late payments is pervasive across all sectors. Our report highlights the health sector as the worst-suffering, as SMEs in this space are owed an average of £89k in late payments. Some industries fare better: the average amount owed to retail businesses stands at £77k, and manufacturing at £75k. But this is still a huge amount of money being withheld from SMEs.

In this context, it’s understandable that almost two-thirds (63%) of our SME respondents told us that late payments have the most significant impact on their business of any external factor. In fact, it raises the question: if this is a problem for such a high proportion of the UK’s small businesses, why isn’t it more widely discussed?

Late payments are not regularly addressed by the press. If you don’t work in a SME, it’s likely that you don’t even know the problem exists. The lack of conversation surrounding the issue can probably be ascribed to the fact that it’s not a problem larger companies have to face. The news is dominated by the big corporations, and not the problems faced by smaller businesses.

But ignoring this issue only perpetuates it. This hidden crisis is part of daily life for most SMEs in the UK, and it’s likely to get worse in the face of Brexit. With all the uncertainty over the exact nature of Britain’s exit from the EU, it becomes even more important to give SMEs confidence. But how can they have confidence when cashflow is being consistently held up by delayed payment?

What can SMEs do to combat late payments?

According to our report, a quarter of SMEs choose to take drastic measures, totally ceasing the supply of goods and services to late-paying customers. This might be the right option for businesses with a wide customer base, but what about those who don’t? It takes time to acquire a large network of customers, and younger companies, especially start-ups, may not be in a position to refuse business, even at risk of late payments.

Another option for SMEs is to seek a loan to bridge the gap. However, our report shows that less than half (43%) of respondents received financial support this year. A small minority (15%) of SMEs rely on their business leaders to use personal savings or assets to cover the shortfall – although this is neither a fair nor sustainable way to operate.

In this situation, it becomes crucial for small businesses to manage their cash flow effectively. This will help SMEs manage any shortfall that might be caused by late payments – and, if the situation is dire enough to require a loan, having a positive cash flow makes it easier to get one.

There are many ways to proactively manage cash flow, but it starts by defining a credit policy. Every vendor should be assigned a set credit limit based on their previous behaviour. Checking a vendor’s commercial credit file through Dun & Bradstreet before extending credit can also help you to avoid the risk of working with a company that pays slowly and can help you decide what credit limit to extend. Read our blog post to learn about managing cash flow in more detail.

Fortunately, regulation may also be forthcoming to protect small businesses from late payments. At the end of 2018, a call for evidence was sent out by Small Business Minister Kelly Tolhurst, working alongside the Federation of Small Businesses. The outcome of this call for evidence has yet to be announced, but SMEs can seek redress through the Small Business Commissioner, who sits on the Prompt Payment Code’s Compliance Board, which regularly reviews all complaints made about late payment.

A future without late payments

It’s resoundingly clear that late payments are a crippling problem for SMEs in the UK. But the outlook is not bleak: there are many signs that the attitude towards this issue is changing, with the promise of better regulation being put in place to protect small businesses - giving them more confidence in the face of Brexit.

Until then, there are some key steps that SMEs can take to limit the risk of late payments; managing cash flow to help proactively minimise the impact, seeking financial support where necessary, and where late payments still occur - redress through the Prompt Payment Code Compliance Board.

Download the report ‘UK SMEs: Brexit and Beyond’ here.