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  • Gary Smith
  • August 2, 2019
  • 4 min read

How new government measures to reduce late payments can improve your cashflow

The Government has introduced new measures to tackle the problem of late payments to small businesses. What changes have been made, what impact will they have, and what can SMEs do to ensure they get paid on time?

Late payments can be devastating for SMEs

SMEs are often described as the lifeblood of the UK economy, and it’s easy to see why:

according to the Government’s Department of Business, Innovation and Skills (BIS), of the UK’s 5.7 million private businesses in 2018, the vast majority (96%) employed fewer than 10 people, while SMEs accounted for 60% of all employment and 51% of revenue.

Yet despite their vital role in the UK economy, running a small business is no easy task. SMEs struggle more than just about any other type of borrower to obtain loans from banks or other lenders. Cash is king, the saying goes, and without adequate funding, SMEs struggle to invest and grow. Many struggle even to survive.

And it’s not just access to external funding that is a challenge for SMEs. A constant complaint from small businesses concerns pressure on their internal funding caused by delays in getting paid by their customers. Large companies seem particularly prone to paying their smaller suppliers late. This can have a detrimental impact on cash flow for SMEs, with knock-on effects on their working capital and the viability of their business.

According to the Federation of Small Businesses, late payments to SMEs result in the closure of more than 50,000 small businesses each year, costing the economy £2.5 billion. On average, small businesses are owed £80,000 each. In 2018, Britain’s small businesses collectively spent £6.7bn simply to collect money they were already owed. It’s clearly a huge drain on the sector.

The government cracks down on late payments

The government has recently taken steps to try to address this ongoing problem. In June, it announced that large businesses could be fined for failing to pay SME suppliers and vendors on time, as part of a government crackdown on late payments to SMEs.

Specific new measures include:

New rules for company boards: entire company boards can now be held responsible for poor supply chain payment practices, and not just finance directors, as previously suggested. To encourage transparency and accountability on late payments, audit committees will be forced to report payment practices in company annual reports.

Shift to technology for invoicing and payments: The government has also announced a new £1 million fund to encourage businesses to use technology to simplify their invoicing, payment and credit management practices.

Greater powers for the Small Business Commissioner: the SBC may be given increased powers to tackle SME late payments and impose binding payment plans, and will also assume responsibility for the voluntary Prompt Payment Code of best practice.

The measures have been welcomed, but with some reservations. Small Business Minister Kelly Tolhurst said of the new measures: “Small businesses are the backbone of our economy and we want to ensure the UK is the best place to start and grow a business. These measures will ensure that small businesses are given the support they need and ensure that they get paid quickly – ending the unacceptable culture of late payment.”

Mike Cherry, Chairman of the Federation of Small Businesses, said: “Small businesses will be delighted with today’s announcement. These measures could finally see an end to poor payment practice. No one should have to wait months on end to receive the money they’re owed…There will be no more covering-up by those who treat smaller suppliers shabbily.”

Some, however, believe the new measures don’t go far enough, arguing that they don’t tackle the root of the problem, which payment terms that are simply too long. Many larger businesses at the top of the supply chain still operate with 90-day payment terms, which can be very tough on SMEs. There are also concerns that fines will not be a sufficient deterrent for large businesses.

In the UK, the average waiting time for invoices of £1m or less to be paid is 71 days, according to UK Finance (formerly known as the Asset Based Finance Association). That’s substantially longer than the standard 30-day (or even 60-day) terms most businesses rely on to keep their cash flow healthy.

5 ways to help your business get paid on time

There seems to be no good reason why larger companies are so bad at paying on time.

Here are five ways you can help to reduce late payments:

1. Invoice immediately: yes, it’s obvious, but important – if you’re late sending an invoice to your customer or client, you’re sending an implicit message that prompt payment is not a priority for you. Eliminate this risk and any future problems or doubts by sending your invoices immediately.

2. Offer multiple ways to pay: these days, your customers and clients should be able to use credit and debit cards, PayPal, as well as newer technologies such as Apple Pay or Google Pay, in addition to the traditional methods of cheques and bank transfers. Making it clear to your clients that you’re trying to make it as easy as possible for them to pay will help to reduce any payment delays.

3. Know when invoices have been received: this is like the feature in some email apps that allows you to see when an email has been read. If your invoicing is automated (for example through your accounting software), then a cutting edge feature allows you to know when the invoice has been received and read. This makes it more difficult for your client to claim that they haven’t received or read it.

4. Make your invoices professional: make them clear, attractive, accurate and detailed. In other words, something that demands action on behalf of your customer, and helps to avoid delays.

5. Set up regular payments: if you are a repeat supplier to your client, you should be able to integrate your accounting software with a payment provider to set up direct debits for your clients. This reduces the administrative burden on them, as well as ensuring that you get paid on time. Such payment providers include Modulr Finance, GoCardless, Stripe and PayPal.

The Final Word

The government’s new measures will not solve the problem of late payments overnight, but they are certainly a step in the right direction.

By using the techniques highlighted above, you should be able to tighten up your invoice payments processes and avoid wasting time and emotional energy on chasing up late payments.

What is your experience with late payments? How much pressure does it place on cashflow and liquidity in your business? And do you think the government’s measures will make a difference? If you would like to speak to us about invoicing and managing your working capital, please get in touch for a no-obligation consultation.

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