Small and medium-sized enterprises in the United Kingdom are experiencing major problems with late payments, particularly from larger customers. Some legislation is in place to assist small business, but the UK’s ruling coalition has pledged further help if it retains power following general elections in May.
But not everyone is convinced further legislation is the answer.
Businesses, especially Small and Medium Enterprises (SMEs), often elect to take no action against late-paying customers for fear of alienating their larger customers. Plus, the biggest companies will likely continue to flex their financial muscles at the expense of smaller and weaker counterparts.
Data seems to bear that out. According to a new report from the Association of Chartered Certified Accountants, firms with fewer than 50 employees are typically twice as likely as larger businesses to get paid beyond the agreed terms. Besides giving rise to tighter financial conditions and higher administrative and financial costs as external financing may be necessary to manage cash flows, late payment can cause insolvency and ultimately lead to bankruptcy.
Over 76% of UK businesses (SMEs as well as larger companies) wait at least a month beyond their agreed contract terms before being paid, according to research from Bacs Payment Schemes Limited. Difficulties in paying staff and utility bills on time, inability to take on more employees, and higher nonpayment risks are just some of the results of poor payment practices.
Although late payments affect SMEs as well as large companies, Bacs data suggest that the former may bear the brunt of poor payment practices. As of January 2015, SMEs were owed more than £32 billion, down from £39.4 billion in January 2014; on the other hand, large firms were owed less than £10 billion, up from £6.7 billion in January 2014. SMEs face an average late payment burden of £31,901 per year.
The ruling coalition headed by Prime Minister David Cameron has pledged to introduce new legislation to tackle the late-payment issue if it retains power following the May general elections. But pundits say a Labor-led government would likely not drop the measure. If that is the case, the legislation has a strong chance of being brought forward no matter which party wins election.
Expanding the current law would be a good move. If the proposed legislation is approved, large companies will be required to publish information twice a year on how promptly they pay their suppliers, beginning in April 2016. Under the new regulation, they will be also required to disclose:
- Standard payments terms, including any changes to these in the last reporting period
- Average time they take to pay the suppliers
- Proportion of invoices paid beyond the agreed terms
- Proportion of invoices paid in 30 days or less, between 31 and 60 days, and beyond 60 days
- Any late payment interest owed and paid
Meanwhile, the current government has implemented new measures to crack down on late payments to public-sector suppliers. Under the new rules, which came into force in February 2015, contractors and subcontractors carrying out work for state entities must be paid within 30 days. Public bodies will also be required to publish an annual late-payment report.
Sharpening accountability around late payment, reducing the backlog of government’s late payments to the private sector, and adopting legislation to improve payment practices are likely to result in substantial savings for public authorities as well. Research from the European Commission, which studied the possible negative consequences of late payments, supports efforts to discourage firms (especially SMEs) with poor payment records from bidding on public contracts.
According to the report, if the government paid suppliers on time, more firms would enter the bidding process as doing so would be more profitable. Time and money saved in the process would lower the costs of public projects.
While legislation on late payments is a step in the right direction, some groups are critical of the new measures. In particular, detractors claim that large companies do not have any incentive to accurately report their payment practices, thereby leaving a wide margin of inaccuracies.
That criticism seems unjustified for a number of reasons. Payment terms will be precisely disclosed by law, no matter whether companies have incentives to do so or not. Also, it is in the interest of companies with good payment records to emphasize their payment performance. The legislation could trigger a “Gresham’s effect” where firms that pay promptly eventually “drive out” companies with lengthy payment times.
In addition, the new law could cause a fundamental shift in the payment performance of the UK’s large businesses, according to Matthew Hankok from the Department for Business, Innovation & Skills. Everybody wins if companies’ awareness of prompt payment practices increases and poor payers are more closely scrutinized.