The Problem of Late Payment

Angus Dent
Posted by Angus Dent on 12-Jun-2015 14:22:58

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Late payment is one of the greatest challenges faced by this country’s small businesses. Not only does it limit their ability to grow by choking their cash flows, it also causes employees to waste time chasing payment which could otherwise be spent more productively.

The government knows this, and changes to late payment legislation stand as the latest addition to their basket of policies aimed at easing the burden shouldered by small businesses. Their objectives here are commendable, but as I wrote recently when discussing their efforts to tackle red tape, getting cold hard results may prove difficult.

The ‘Prompt Payment Code’ set up by the government seven years ago has certainly not had the desired effect. Signing up to this voluntary measure means that a business is bound to certain payment terms, but, somewhat predictably, only 1,700 businesses have got involved. More recently, the EU launched their Directive on Late Payment in an attempt to instigate a 60 day payment window. But a loophole allowing longer payment terms if the supplier agrees has hamstrung this policy’s potential. Food giant Mars have reportedly capitalised on this loophole, increasing their payment terms from 60 to 100 days and using their market power to coerce suppliers into agreeing, or facing the possibility of losing contracts.

late pay

There are legal options available to the victims of late payment; businesses can charge interest to their debtors, for instance, but only 10 per cent of SMEs are reported to have used this for fear of losing business. With the IT Firm Sage estimating that some £55bn is currently owed to the UK’s SMEs, there is clearly a need for a more workable solution.

The government’s newest initiative is named the Small Business Conciliation Service and uses an Australian model as its precedent. The Service will be used to mediate disputes between debtors and creditors and thus smooth the payment process.

Yet even if this Service becomes a tremendous success, late payment will not disappear overnight. And as Professor Nick Wilson of Leeds University Business School points out, at the moment “[SMEs] have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”

But as we know, the banks aren’t lending. So where should SMEs look? For many businesses, the burgeoning alternative finance sector could be the answer.

Topics: business, business loans, EU, payment, sme, Government, late payment

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