The Importance of Prompt Payment for Small to Mid-Sized Enterprises

September 8, 2021
Philip King

Philip King, former interim small business commissioner and champion of the Prompt Payment Code, reflects on late payment culture, how small and mid-sized enterprises (SMEs) are coping with these challenges and what corporates can do to support their supply chains.  

Over the last few years, I’ve had numerous conversations with small business owners about the negative impact late payment has had on their lives and wellbeing, as well as on the financial state of their businesses. 

People like James, the owner of a small web design company in the Midlands, openly talk about the sleep deprivation, eating disorders, relationship difficulties and mental health problems he suffers from due to late payment from customers. 

Real-life experiences like James’ shed light on the consequences of late payment and add tangible and qualitative evidence to the myriad quantitative research that late payment hurts SMEs. 

I’m always interested when new research results are published, and I’ve recently seen some alarming statistics regarding late payment.

Late payment is a challenge for SMEs 

Earlier this year, C2FO conducted a worldwide survey of more than 6,700 leaders of SMEs and found surprising alignment in terms of access to liquidity, the cost of borrowing, and their outlooks for the future. 

Published in March, the 2021 Working Capital Survey showed: 

  • 23% of SMEs said they were worried about late payments from customers
  • 40% of SMEs were uncertain about customer contracts and orders
  • 31% of SMEs were concerned about difficult relationships with customers and suppliers
  • 37% of SMEs reported that late payments had increased in 2020
  • 28% of SMEs reported that at least a quarter of their customers had extended payment terms over the past year

Another recent study conducted by Pay.UK and the Chartered Institute of Credit Management (CICM) in 2020 reported similar findings from SMEs.  

The study found that:

  • 51% of SMEs experienced late payment, broadly in line with the 54% reported in 2019 but significantly above 2017 and 2018 statistics. 
  • The total late payment debt owed to small businesses in 2020 was £17.5 billion, surprisingly better than the £23 billion reported in 2019 despite the impact of COVID-19, but much higher than the £12.9 billion and £14.2 billion owed in 2018 and 2017, respectively.

Although there have been some great examples of large companies taking positive action to support their small suppliers by accelerating payments, including award-winning C2FO programmes offered by Philips and Borealis, these two surveys show that the late payment problem remains an issue.

SMEs have always faced many challenges. However, in addition to late payment concerns, SMEs are confronting the effects of the pandemic, such as lost revenue resulting from temporary business closure, taking on unexpected debt in the form of bounce-back loans, and managing staff on furlough. Dealing with the furlough scheme ending is bad enough, but additional pressures arise as businesses emerge from the pandemic.

Recruiting and retaining the right staff is difficult, raw materials are in short supply, shipping costs are increasing massively, the documentation required to support exports and imports has grown exponentially, and many customers and suppliers have been forced to shut down.

Optimism despite uncertainty

Throughout my years of talking to small business owners, one of the key things they want is a degree of certainty, and that’s the very thing that has been missing over the past 18 months.

Yet, despite all this, there are numerous reports that business owners are increasingly optimistic. In April, the Federation of Small Businesses (FSB) said it had found the greatest level of optimism among its members since 2014. Global accountancy firm BDO UK found that firms were at their most optimistic since June 2005. In the same month, the British Chambers of Commerce reported that 63% of small firms surveyed were confident in their growth prospects over the next 12 months. 

Of course, being optimistic that the future will bring improvements is not surprising when the previous 18 months were as difficult as they had been. Being optimistic about the months ahead doesn’t remove reality’s current challenges.

It’s also worth noting that recent commentary has been less favourable, with the August IHS Markit / CIPS Flash UK Composite Output Index reporting a considerable drop in private-sector output growth from July through August, according to IHS Markit

Helping SMEs access liquidity

Small business owners need to be confident that they have the cash flow required to maintain their business into and through recovery. The last thing they want is to worry about whether a customer will pay them for goods or services they’ve supplied. They can get help in keeping cash flow coming in from various sources and in different ways.

Businesses can help themselves by applying the basic principles of credit management whenever they supply on credit. This will help ensure they get paid promptly for the goods or services they have provided. Help can come from their customers — particularly large businesses — when they take responsible action to support their supply chains and making sure payment terms are negotiated fairly and payments are made on time.

In addition, external parties like C2FO can help companies by ensuring SMEs have access to low-cost working capital on-demand. Through early payment on the C2FO platform, suppliers can gain access to cash without growing debt and bring in capital to meet seasonal demands.  Suppliers offer a discount they’re comfortable with in exchange for faster payment from their customers. 

Sometimes, a combination of the above can make the SME owner’s life easier and help their business flourish. 

Late payment means more to SMEs

The unfortunate alternative is suffering from the impact of late payment and, as I said earlier, the effect is not just financial. For a large business, paying a supplier late can be a few rows on a spreadsheet for a few more days. For the SME owner, it can be the difference between feeding the family or not.

I’ll never forget a conversation I had when I was Small Business Commissioner. Our team intervened to collect overdue invoices totalling less than £1,000 from a large company for a small business. The owner explained that we had enabled her to go grocery shopping that weekend when she thought she wouldn’t be able to. 

Late payment can impact wellbeing and mental health, and the whole business community has to do everything in its power to keep cash flowing and ensure it reaches the smallest businesses that are so key to our economic recovery.

Turnover is vanity, profit is sanity, but cash is reality, and we cannot ignore that. 

Philip King was the 2020-2021 interim small business commissioner for the UK. The Office of the Small Business Commissioner is an independent public body launched in 2017 to better police fair payment practices for Britain’s small businesses and support them in resolving payment disputes with bigger companies. King is also the former CEO of the Chartered Institute of Credit Management (CICM). He has more than 42 years of experience in credit management and related areas.

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