Tackle late payments to save 50,000 SMEs » SMEInsider

Tackle late payments to save 50,000 SMEs

The Federation of Small Businesses (FSB) has today launched a new report into the effect of late payments on smaller businesses. And it has found that 30 per cent of payments to SMEs are late, with 37% of businesses reporting that this causes significant cashflow problems day to day. It also suggests that late payments and resulting cash flow difficulties have caused businesses to fail.

In 2014, if payments had been made on time and as promised, 50,000 business deaths could have been avoided, growing the UK economy by £2.5 billion – a vital uplift to UK GDP just as business confidence dips amid fears of a weakening domestic economy.

Among the key findings of the report are:

  • 30 per cent of payments to UK small businesses are late.
  • Average value of each late payment is £6,142.
  • 37 per cent of small businesses say late payment causes cashflow problems.
  • Ending late payments would have saved 50,000 UK businesses from failing in 2014.
  • This would also increase the gross value added (a measure of economic output) to over £1 billion.

The FSB report also claims that a better enforcement regime on late payments could save up to 25,000 business failures.

 

‘25,000 fewer business deaths’

“We estimate that, if the UK had a similar payment delay ratio to Germany, then there would be about 25,000 fewer business deaths per year, contributing to an uplift in gross value added (GVA, a measure of economic output) of over £1 billion,” the report states. “A situation without any payment delays would have kept over 50,000 companies in business in 2014, generating a £2.5 billion uplift in GVA to the UK economy.”

So what can be done? The FSB says that existing legislation has been ineffective in addressing late payment culture. “Only 20 per cent of companies say they have seen a positive effect from the EU Late Payment Directive,” it says.

In response to this, the FSB argues that “Poor payment practice should be at the heart of the Government’s corporate governance agenda. The Government has signalled that it may look to make reforms on boardroom governance and rebuild trust in larger businesses. For too long the UK’s payment culture and supply chain bullying have been ignored in the corporate governance debate. The Government should, therefore, make this a key area of focus in any proposed reforms. This should take place alongside tackling wider supply chain bullying, including the imposition of unfair contract terms on smaller businesses.”

 

‘A chilling effect across the economy’

Mike Cherry, National Chairman at the Federation of Small Businesses, said that, “Uniquely, the UK now risks having a business culture where it is acceptable not to pay SMEs on time. Based on an imbalance of power between large companies and their small suppliers, this now has a chilling effect right across the economy. It’s distressing to hear from our members that in 2016 the average value of each late payment now stands at £6,142.

“Small businesses have to run a tight ship with their cash flow, and as they struggle with increasing business costs on one hand and an uncertain domestic economy on the other. They should not also have to struggle with the stress, time and money required to chase overdue payments from corporate giants.”

The FSB have several key policy recommendations to address this growing problem:

  • Make it mandatory for all FTSE 350 businesses to sign up to the Prompt Payment Code and introduce a penalties regime for repeat offenders of poor payment practices.
  • Regulations should give the SBC a specific remit to directly address supply chain bullying.
  • Supplier interests should be represented at executive board level as part of the Government’s ambition to strengthen the stakeholder voice on executive boards
  • The SBC’s “name and shame” powers should be used effectively.
  • A timetable around the appointment process for the SBC should be published immediately.