26 Jul Turning the UK’s late payment problem on its head
Late payment is a key challenge for UK SMEs. Severe cash flow crisis is the primary cause of business failure among UK SMEs, and can even topple established businesses within a matter months. When large payments are delayed, sometimes by multiple customers, the effects can be devastating. Late payment can also cause a domino effect. When a business is not paid it can be difficult in turn for them to pay their own suppliers, who in turn cannot pay theirs.
We discuss how the Pay4 facility to settle your invoices can help bridge the gap created by late paying customers, while allowing you to be a prompt payer to your own suppliers. You can also benefit from discounts and the good reputation that provides.
The Scope of the Late Payment Problem
3,694 companies became insolvent in England and Wales in the first quarter of 2016. Debt is a key reason for businesses to fail, and in today’s uncertain economic conditions, the risks are amplified further. Many large companies have been called out for unethical payment practices in the press, but that’s of little comfort to the businesses that have to deal with this every day.
Big brand late payers can lead to PR fallout, and Tesco have introduced special 14 day payment terms to some of its suppliers on the back of this. Hopefully other large firms will follow suit.
While UK late payment laws offer some deterrent, as of 2016, they still can’t fully protect businesses from suffering (or even collapsing) from late payments. This is because they lack the teeth to make a real difference. Businesses need to formulate a strategic plan to cope with the cumulative effect that consistent and multiple late-paying customers can have.
Embedded Late Payment Culture
If the occasional invoice slips over the deadline, it’s not the end of the world, for most businesses.
However, the sheer scale of the UK’s late payment problem points to a pernicious culture. Late payment is sadly often a strategic goal. Sometimes it’s part of a company’s unofficial business model, and the practice is embedded in their corporate culture. Therefore this can be tough to overcome.
A survey carried out in 2015 by Tungston highlighted the scale of the problem. It suggests that the average SME is owed £40,857 in unpaid invoices, with over 50% of that total being overdue. Of the 1,000 companies surveyed, 23% said that late payments have put them at risk of closure.
According to a 2014 survey undertaken by Bacs (the organisation behind Direct Debit), 25% of businesses that reported late payments spend 10+ hours chasing those invoices each week. Clearly this is a drain on productivity, producing spiralling costs.
The Pernicious Effect of Late Payments
Late payment from customers can cause a dangerous and far-reaching domino effect. When a business is not paid it can be difficult for them to pay their own suppliers, or simply to pay their monthly bills. Late payment therefore has a trickling effect down through the supply chain, causing disruption for many businesses.
When customer payments aren’t coming in and cash reserves are low, even when a company is in a position to pay their own suppliers, it can still lose out. This is because they don’t have much working capital. The company perhaps can’t replenish stock the way that it wants to. They are prevented from buying stock in bulk or from benefiting from early payment discounts.
Seasonal businesses can be particularly affected. They can’t afford to replenish stock during the quiet months, (which often is sold at a discount out of season) and cannot use the down time to make business improvements. This is because they simply don’t have the capital to do so.
Government Initiatives Fall Short
Directive 2011/7/EU, theoretically protects all businesses. It allows late fees and charges to be applied to late invoices of any amount. Fees range from £40 to £100 per invoice, plus a small amount of interest: 8%, plus base rate. Determined offenders are unlikely to be dissuaded though. Since the UK has similar legislation, the good news is that we’re likely to retain the right to charge these fees after Brexit.
Public sector organisations are now legally bound to pay so-called ‘prime’ contractors within 30 days. With luck, this should improve their poor track record with prompt payment.
The government has plans to up the ante with the Small Business, Enterprise and Employment Act. This will force businesses to report publicly on their payment practices. However, the delays in rolling this out suggests implementation will be complex.
These initiatives are admirable, but are still failing the many businesses that tackle late payments on a daily basis. Businesses must therefore look to finance options to bridge their cash flow gaps.
Thinking Beyond Invoice Finance
Invoice finance has grown exponentially in the UK. According to ABFA, the amount of invoice finance received by UK small businesses has risen by over 60% between July last year and July 2016. Around 80% of asset based finance is now invoice finance. On the face of it, you would think that invoice finance is the logical choice for SMEs who struggle with late payment. If you have an outstanding invoice, you can get paid on time for that invoice. Problem supposedly solved. Except that invoice finance doesn’t get to the heart of the problem: that late payment effects the entire supply chain.
By this we mean that invoice finance cannot always prevent your own company from becoming a late payer. If you have no invoicing line to draw against, where will you find the cash flow to pay your own suppliers?
If you are growing quickly, you’ll likely need to buy stock/resources well before you’re in a position to provide your product to your customer. So well before you can raise an invoice and then get it discounted. If you only use invoice finance, quick growth is just one scenario that puts a severe cash strain on your business.
If you have a seasonal business, invoice finance is also a poor choice. Just when you want to stock up in anticipation of peak seaons, is exactly when your sales are lowest. Therefore your ability to draw on your invoicing line is limited. Also, many invoice finance facilities will not cover invoices to overseas customers. And what about those businesses who don’t invoice their customers at all, such as retailers? Invoice finance simply isn’t an option.
Maybe it’s time to turn the issue of late payment on its head. Instead of looking at the unpaid invoice, look instead to your own suppliers for a solution.
A Revolving Credit Facility To Pay Your Own Invoices
A facility to pay invoices you owe, provides a flexible way to bridge the gap caused by late payment.
The concept is simple. Funds are available to pay your own invoices as soon as you’re billed for goods or services. The Pay4 facility therefore protects against cash flow crises caused by late payments in several ways:
The facility ensures that you can pay your own invoices on time, regardless of late paying customers.
Late-paying customers will never again stop you from re-stocking or making business improvements.
You never have to compromise your own cash flow in order to pay suppliers on time.
Your business can ride out seasonal downshifts, without delaying making those much-needed purchases.
With a healthy payment relationship in place, your business is free to exploit better terms and deals.
So by using the Pay4 platform, the scenario where paying suppliers is at the behest of your customer paying you, turns into a strategic advantage to the business. You have, in effect turned the late payment problem on its head.
While businesses have some protections against late payment, it’s clear that they aren’t enough. By using supplier payments finance to smooth out variable cash flow cycles, you are in in a better financial position. You are less exposed to the domino effect that late payment causes, and less dependent on customers that push payment terms to the limit.
If your business can benefit from the cushion of a revolving credit facility, speak to us. Pay4 is secured by trade insurance. This means we don’t require you to provide security such as personal guarantees or business assets.