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Can SMEs do more to protect themselves against late payment?

By CreditMan Tuesday, March 8, 2016

  • First Capital Cashflow provide insight and advice to SMEs suffering from late payment issues
  • 3 out of 4 European companies have experienced late payment in the last 3 years
  • 59% of manufacturing companies admit they had been asked to accept longer payment terms than they felt comfortable with
  • SMEs need to be more proactive and authoritative to solve the late payment problem

Three out of four companies in Europe have experienced late payments in the last three years, with SMEs likely to be disproportionately affected by this phenomenon.

This is a quote taken from the Ex-Post Evaluation of Late Payment Directive study, published in November 2015, which is set to inform a report on the implementation of the European Union’s 2011 Directive 2011/7/EU (LPD) to be read before the European Parliament and the Council in March 2016.

As many businesses will be aware, late payment is still a large-scale problem, with Bacs reporting in July 2015 that SMEs spent a collective £10.8 billion last year in attempts to recover overdue payments, up from £8.2 billion in July 2014.

A recent government report stated that, as of January 2015, £32.4 billion was still owed to the UK’s 5.3 million SMEs, demonstrating that there is still much to be done to remedy this issue.

Furthermore, results of the Hilton Baird Late Payment Survey claimed that, as a direct consequence of late payment, one in ten British businesses had to turn away new business, confirming the findings of an Intrum Justitia report which discovered that 36% EU business believed their very survival was threatened by late payment.

So what lies ahead for businesses in terms of late payment regulation, and what can be done in the meantime to safeguard against it?

Calls for a Culture Shift

When the LPD was first introduced in 2011, it was accompanied by an awareness campaign which was intended to inform businesses in all EU member states about the new rules regarding late payment. The success of this campaign is disputed.

The Intrum Justitia report found that only 19% of those working in the Public, Education and Healthcare sectors had heard of the EU Late Payment Directive, with only 4% claiming they have seen a positive impact. Similarly, in the Real Estate sector, less than a quarter of businesses surveyed (24%) had heard of the directive and only 12% had seen a positive impact.

Furthermore, the Ex- Post Evaluation study claimed that, even if the campaign did raise awareness, it was not ignorance of the rules that was the problem. It’s an active dismissal of the rules as the result of a prevailing business culture which sees smaller suppliers suffer at the hand of power imbalances, where larger companies impose longer payment periods:

“…tolerating late payment against the promise of future business is often a rational choice... this combination of incentives makes it very hard for policymakers to tackle late payment.”

Nowhere is this more obvious than in the Manufacturing sector. According to the Intrum Justitia report, 58% of manufacturing companies claimed their customers intentionally pay later than agreed, with 59% admitting that they have been asked to accept longer payment terms than they feel comfortable with.

The latest Tesco scandal, uncovered by the Groceries Code Adjudicator, saw this supermarket juggernaut intentionally delay payment to smaller suppliers in order to boost their bottom line and placate investors. This is a great example of this issue and, having been met with much criticism from the media, could this possibly signal a change in mind-set?

Recommendations from the Ex-Post Evaluation suggested that, if any awareness campaign was to be run in the future, it should be one aimed at making late payments a “socially unacceptable” practice in all member states.

In light of this, it seems that it may be down to small businesses themselves to ensure that they protect themselves against late payments, rather than relying on legislation to do the job for them.

Make Payment Easier

A report entitled Size Matters: the late payment problem, published in 2011, claimed that 80% of B2B transactions are based on credit. It is the inability of small businesses to pay their suppliers, before being paid by the customer, which can cause the cash flow issues that result from late payment.

A possible reason for this could be the time it takes for cheques to be processed. As part of the Small Business, Enterprise and Employment Act, which was passed March 2015, it was agreed that electronic imaging of cheques can now replace cheques’ physical presentment.

When the policy was first suggested, a consultation was run concluding that “both large and small businesses benefit from paying in cheques remotely.” The consultation reported that cheques still accounted for a quarter of outgoing payments from small businesses, micro businesses, sole traders and charities, with 66% of the latter’s donation values coming from this channel of payment.

While faster clearing times will no doubt positively impact those who still use cheques, more can be done to reduce time taken for payment, even if it is just by a day or so.

Mike Hutchinson from Bacs, in a press release entitled “Late payments costing SMEs billions”, urged businesses to “look at automated payments like Direct Debit to reduce the time and money that companies are spending to recover payments due to them.”

Louisa Buckingham of Direct Debit and payment processing solution provider, First Capital Cashflow, agrees, commenting: ”The benefits of paperless Direct Debits are numerous; it cuts down administration and postage costs and reduces processing time and error rates, all resulting in faster payment times and fewer unpaid invoices.”

She continues: “SMEs need to protect themselves from the consequences of late payment, and one of the best ways to do this is through having full visibility and control over cash flow. Simplifying reconciliation will not only aid efficiency, but it will also boost business relationships as the room for error is minimised.”

Looking to the Future

In order for the UK economy to expand and recover fully, businesses need to continue growing. Capital investment and the ability to recruit more staff is key to achieving this.

In the most recent Small Business Finance Markets report from the British Business Bank, it suggested that one of the main challenges still facing the UK economy was a lack of small business ‘up-scaling’, with OECD data showing that many small businesses in the UK are still failing to grow by more than 10 employees after three years.

Despite the report claiming that 56% of small businesses they spoke to were intending to grow in 2016, it is this lack of recruitment ability that remains a sticking point.

Late payments pose a huge threat to job creation with over a third (37%) of Business and Professional Services sector businesses surveyed by the Intrum Justitia report claiming that recruitment is “largely hindered” as a direct consequence. Worse than that, one in five are considering laying off staff due to cash flow issues. In the Construction industry, 41% of respondents claimed they would definitely or probably hire more staff if their customers paid faster.

Despite low interest rates, capital investment also remains limited with 77% of those in the Leisure, Hotel and Restaurant sectors insisting that they had seen no impact at all on R&D or operational asset investment as a result of the unusually low rates. In Telecommunications, Media and IT, 73% claim that there has been no effect on their ability to finance growth.

It is clear that much more needs to be done moving forward to protect small businesses against this sorry state of affairs, but what can businesses themselves do in the meantime?

1) Be Proactive
Switch to faster and more efficient payment methods, as mentioned above, and ensure you have a robust credit management system in place. This should allow businesses to defend themselves against payment gaps.

2) Be More Authoritative
Implement swift reminders and charge interest on late payments where possible. By acting immediately, and with confidence, businesses may start to see a shift in the prevailing business culture resulting in long-term benefits for the 99% of UK businesses that fuel this economy.

About First Capital Cashflow
Having started trading in 2001, First Capital Cashflow has become one of the UK’s leading providers of bespoke BACS processing services that incorporate Direct Debits. Working with businesses and non-profit organisations, First Capital Cashflow is a BACS-approved bureau that provides proven solutions that are designed to help its clients overcome their main financial challenges.