The Waiting Game: Why SMEs Wait Longer for Payment

by Martin

Today’s article is brought to us by Trudy Oldman, a regular financial whiz, sharing her insights, opinions and very best ideas with SMEs and individuals in regular blogs, interviews and articles across the web and media.

There’s plenty for UK SMEs (Small & Medium Enterprises) to whinge about in the current economy. From red tape to zero-hours contracts, the niggles that plague small British businesses are certainly not in short supply. Yet, topping the list of SME grievances has to be the mother of all corporate irritations: late payment.

Late payments have been a serious problem for small UK businesses for the past 8 years and the situation shows no sign of improving, despite limp government attempts to intervene. Schemes like the PPC (Prompt Payment Code), set up in 2008, which aimed to encourage big firms to sign up in order to cough up, have had little or no impact. Today (July 2014) the problem is worse than ever. Payments owed to SME have hit the £40bn mark, £3bn higher than the previous peak of 2012 and significantly more than 2013′s £30bn late payments.

Fighting back.

With government intervention failing to improve the situation, increasing numbers of SMEs are working to reduce late payment themselves. Free company checks have seen a substantial surge in interest, for instance. These tools put the power in the hands of SMEs, giving them the information they need to make informed decisions about who they want to work with. They can provide crucial details such as payment history (including details of missed and late payments), legal issues (such as CCJs) and assets (which can help SMEs gauge whether or not a prospective client has the funds to make payment at all).

One rule for one…

Yet savvy client selection and careful due diligence can’t help to hasten late payments and chase down non-payment once the situation arises, particularly in an economy where big companies are often the worst offenders. Unfortunately, these large companies are very valuable to smaller businesses. They offer big contracts and an important revenue stream. This gives them the power to consistently pay late without negative consequences.

Like it or lump it.

With a lot of money on the table, it’s extremely difficult for humble SMEs to protest about late payments. In a competitive marketplace full of big businesses like Apple, Tesco and Wonga, it’s important to make life as easy for your biggest customers as possible. Often there is a queue of similar business waiting to step in if an SME causes bother for a bigger business. Take a late payment issue too far and you risk losing a valuable client. In this environment it’s a case of like it or lump it for small businesses struggling with late payments from bigger firms.

The state of play.

In 2013-2014 small companies with an annual turnover of below £1million waited an average 71 days for payment, far longer than the average 30 day payment terms that appear on most invoices. By contrast, firms with £500million+ annual turnovers waited an average of 48 days for payment. This discrepancy is huge and is having an equally sizeable impact on the growth of UK SMEs and on our economy as a whole.

With a distinct lack of parity between SMEs and larger enterprises, SMEs are increasingly struggling to fund their growth. With the economy seeming to rally after a long spell in the post-credit crunch doldrums, the smaller business (which the government continues to insist are the powerhouses of the UK’s economic recovery) are the ones struggling to find the funds to invest in their own growth. With late SME payments looking like an endemic part of our economy, the available capital smaller companies need to grow remains tied up in the kitties of large businesses.

Is there a solution?

I’ve already talked a little about using detailed company information to make informed choices about the businesses SMEs work with, but with valuable contracts on the table, it’s not always easy to turn away businesses – even with a history of late payment. I’ve also mentioned the ongoing failures of the PPC – a code which many of the FTSE 100 (including Sainsbury’s and GKN) flat-out refused to sign up to. With so many problems, how on earth can SMEs even start to see a light at the end of the tunnel?

One solution, proposed by the BMF (Builders Merchants Federation), is to name and shame persistent late payers. The BMF recently called for mandatory disclosure of payment practice. This step would make late payment public, without putting small businesses in a difficult “tattle tale” position which could jeopardise valuable contracts. Still, a concrete and effective solution remains to be put in place.

Is your SME’s growth hampered by late payment? How do you think the government should handle persistent late payers? Share your views and experiences with our readers below.

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