Personal financial worries, stress, depression and anxiety are all direct results of cash flow difficulties caused by late payment 

If SMEs were paid on time by their big business clients, our economy would be boosted by an estimated £2.5 billion a year.

A report by the Federation of Small Businesses (FSB) makes this shocking claim, along with many other alarming statistics surrounding the economic impact of the late payment habits of UK plc.

The late payments culture pervades the entire business landscape, but the unjust truth is that SMEs and startups are disproportionately affected. 61% of small businesses are paid late by big businesses, and the further down the food chain you are the larger the impact on your organisation.

SMEs are at the mercy of the payment habits of big corporations

Large corporations enjoy all the payment power and throw their weight around by insisting on long payments terms or simply paying routinely late. They do this knowing that smaller firms are unlikely to take any action or charge any interest, despite their statutory protections.

This creates a trickle-down effect, impacting the ability of suppliers to pay their own suppliers, and results in cash flow issues for many smaller businesses.

These issues are compounded by the fact that many smaller businesses are unable to cope with such interruptions to their cash flow, since they do not enjoy the comfortable financial buffers of healthy bank balances or extensive credit facilities, unlike their larger and more established counterparts.

The FSB’s report suggests that as many as 50,000 fewer businesses would go under each year if their clients simply paid on time.

Take Carillion, for example. The construction industry has the worst payment record of all industries and makes up 31% of all late payments owed to SMEs. This leaves many SMEs within the sector operating on a knife edge.

Carillion’s demise last year highlighted the dangers of big businesses operating with onerous payment terms. It was revealed that the firm was paying thousands of small businesses operating as sub-contractors for the firm on 120-day terms, and offering earlier payment if they would accept a reduced payment. This is tantamount to supply chain bullying; putting downward pressure on prices by imposing lengthy payment terms.

At the time the Carillion went bust they owed 30,000 contractors an estimated £1billion. As a result, insolvencies within the sector spiked by 20% in the first quarter of 2018. How different could that figure have been if those businesses had been paid up to date within the last 4 months?

The bigger picture

There are a variety of quotes and reports out there that estimate the totals SMEs are owed in late payments at any one time, and the numbers range from £26bn (Bottom Line’s Business Payment Barometer 2018) to £46bn (Zurich’s SME Risk Index) depending on whose tale of woe you think adds up to the most likely scenario.

In addition, statistics show that as many as 350,000 Britons annually lose their jobs when their businesses’ circulation is cut off by the squeeze of late payment culture and that 3.4 million new jobs would be opened up due to business growth if the late payment culture was addressed.

There is more than merely financials at stake for UK business, though.

The impact on business owners

A survey by the Prompt Payment Directory, where 1,000 SMEs suffering from poor cash flow as a result of late or outstanding invoice payments were polled, discovered the upsetting truth about how this business practice really impacts on real lives in the real world.

36% of business owners are sacrificing their own salary to protect their business and employees when cash flow is affected, and this lack of income means that almost one-quarter have struggled to pay their mortgage or rent or have even lost their family home.

17% have been forced to remortgage to make up the deficit, a quarter have been forced to cash in financial assets like pensions and shares to fill in the gaps.

28% of respondents have had to cut back on their social lives, cancelled their family holiday and cut down on celebrations and extravagances like eating out and entertainment budgets.

The financial consequences of late payment culture have a grave knock-on effect on people’s relationships. 12% of business owners have experienced pressure on their relationship, or even relationship breakdown (7%) and some have even been forced to rehome their family pet.

These money worries all have an effect on the mental wellbeing of SME owners. The survey showed that 29% of UK SME owners struggle with their mental health as a result of late payment. Finance-related stress is a major cause of depression, suicidal feelings, increased absenteeism and poor productivity and can lead to greater dependence on prescription drugs and alcohol, with a domino effect on physical wellbeing. Over one-third of respondents suffer from lost sleep and 7% attribute hair loss to the stress and anxiety caused by their business worries.

Hitting back against late payers

There is a great deal of sadness and hardship surrounding late payment culture. Organisations that deliberately force their suppliers to endure lengthy payment terms to safeguard their own cashflow do so at the expense of the overall economy, and the financial and personal wellbeing of real people.

The Government has long been trying to protect SMEs against late payment, but schemes like Duty to Report only go so far to address the issue, but what can SMEs do to help themselves?

The standout advice by organisations tasked with fighting back against big business is to stop accepting late payment as an inevitability. Be armoured against notorious late payers by always performing credit checks, investigating new suppliers on websites like The Prompt Payment Directory.

A big aspect of tackling the late payment culture will be by increased enforcement of Duty to Report, however since 78% of SMEs are still unaware of these requirements the government has its work cut out for ensuring the scheme has the desired effect.

The Forum of Private Businesses, a not-for-profit business support and protection organisation, said FTSE-listed companies should be “required to provide detailed information on standard payment terms and the proportion of companies paid within this time.

“Larger companies are sometimes able to dictate payment terms and this has a knock-on effect on the rest of the economy,” the lobby group said.

The FPB also advocates that SMEs should opt for the use of invoice finance as a “more effective solution to late payment”.

Obviously, we agree that is a superb idea

At Partnership Invoice Finance, we are proud of being part of a solution that can offer relief to SMEs and business owners from the squeeze of long payment terms and overdue invoices. Our invoice finance and factoring services can mitigate risk, alleviate financial pressure and free up working capital so that SMEs and startups can thrive, not just survive. If we can save some sleep, hair, marriages and family pets in the process then all the better.

To discuss our services and whether we can help your organisation free up working capital tied up in your invoices, get in touch with our expert team.

Image: Business photo created by jcomp