An easy answer to the late payment crisis

By Guy Corbet, Fourteen Forty

Small businesses, not taxpayer handouts and public works, will be at the heart of economic recovery.  They will start up, create jobs, build, grow and bristle with vitality.

Some will say small businesses need handouts and top-down schemes to get moving again.  But not necessarily.  For a great many, getting the money that is already theirs will be enough. 

Late payments are the most common problem that small firms face.  But they don’t have to be. 

Looking at the root causes, company policy or “prudent financial management” by larger customers, quickly points to straightforward answers.

The solution is to rename late payment as “unapproved debt”, set default payment terms to 30 days and require PLCs to report on their performance in annual reports.

Late payment destroys jobs

Our client, Xero’s data shows that late payments cause a cash-flow squeeze which contributes to some 50,000 small business failures each year. 

At any one time, typically each firm is owed £24,841.  This equates to around 10% of a small firm’s turnover on average. 

Across the economy, this amounts to £141 billion a year of their own money that is not available for small firms to build their businesses and create jobs.

Xero analysis of payment data shows that larger firms pay more slowly.  On average firms in the FTSE350 pay up seven days more late than smaller firms. 

A Federation of Small Businesses survey of 4,000 firms reported that since the March 2020 lockdown 62 per cent of small firms have seen an increase in late payment or had payments frozen.

Decades of failure

For decades governments have paid lip service to the problem, but they have not fixed it. 

In 2008 the Prompt Payment Code was set up.  More recently in 2017 the Payment Practices and Performance reporting was introduced, requiring large firms to file away details of their performance on an obscure Government site.

There is, until 24 December 2020, a consultation on how the Small Business Commissioner could do better.  The Commissioner was launched in December 2017. Today it boasts at having “got back £7.43 m in unpaid invoices for small businesses so far”.  It also says late payment cost the UK economy £2.5bn a year. 

The root problem is deliberate or neglect

Late payments once stemmed from inefficient manual processes.  But the world has automated. 

Payments are now late because (a) invoices don’t get passed on to finance teams to be paid or (b) it is company policy to be prudent with cash flow, often delaying payment for as long as possible.  Remember Carillion, where payments were late and standard terms were 120 days.

Indeed, it is often considered “best practice” to pay late or impose 60- or 90-day terms.  Suppliers don’t complain lest they sour relationships. 

The answer is straight forward

It’s time to recognise that the late payment problem is often due to those company policies.

Once that is recognised, solutions become clearer.

1. Call it “unapproved debt”.  The expression “late payment” is a vanilla term for using someone else’s money without their permission.  Renaming it “unapproved debt” would help make it clear that it is not a by-product of prudential cashflow management. It would present it as unapproved finance, which should be explained or scrutinised internally and externally.
2. Set payment terms at 30 days.  Too often larger firms set their payment terms at 60 or even 90 days.  That may be acceptable between PLCs, but for large firms to impose these terms on small ones is not. Standard payment terms should be set at 30 days.  Longer terms should still be allowed, providing firms keep track of how many of their contracts operate on 30, 60 and 90 day bands, and they are happy to explain why. 
3. Require annual report reporting.  It should be a reporting requirement for PLCs to set out their payment performance in their annual reports.  As well as breaking down the payment terms, they should be required to explain why they are using “unapproved debt” to finance their firm.

These steps should be introduced now, when the economy needs small businesses to pick the economy up off the floor. 

This is not a request for a handout, or a concession.  It is simply to ask is that small firms be allowed to have, and use, what is theirs.

It is a real opportunity for government to show that it is helping remove barriers to growth, job creation and prosperity.