Eradicating Late Payments: A Silver Bullet For Derbyshire’s SMEs?
Late payments have become a major problem for the UK’s small and medium-sized enterprises (SMEs). Since 2014 an estimated 400,000 SMEs have gone bust while waiting to be paid, according to Labour Party figures. A 2023 Nat West survey, found that 27% of UK small businesses – over 2 million in total – were owed between £5,000 and £20,000 in unpaid invoices, and over 50% said that late payments were an increasing problem. By early 2024, the total amount of late payments in the UK was valued by the Office for National Statistics at a staggering £20bn, costing the UK economy £2.5bn per year.
The new Government has pledged to crack down on late payments. In its manifesto the Labour Party pledged to, “Stamp out late payment of invoices to small businesses, requiring large businesses to better report on their payment practices to expose late payers.”
As a small business and with most of our clients requiring business insurance, we’re acutely aware of the problem of late payments. Global trade credit company Coface revealed this year that haulage and logistics businesses are experiencing payment delays averaging 51.5 days and that the number of firms awaiting payments is rising. In the last year, we’ve heard tales from many of our truck insurance clients frequently bemoaning the problem of late payments. And they are not alone. Many of our other small business insurance customers – particularly our shop insurance clients – are facing the same problem. Combined these sectors are worth more than £260bn to the UK economy and contribute over £5bn to the Derbyshire economy alone.
In this blog, we’ll consider the problem of late payments for Derbyshire’s logistics and retail businesses and look at what can be done to solve the issue. We hope this will prove to be of interest, and if you’d like any small business insurance help – be it shop insurance, truck insurance, or SME insurance, then please get in touch. You can call us on 01332 320540 or email Coversure Castle Donington.
Why Are Late Payments A Problem For Small Businesses?
SCORE research suggests that cash flow is the main reason for small business failures. Their most recent data states that 82% of SME failures are down to a lack of cash. Late payments are often cited as significant factors with cash flow problems. There are, alas, other reasons why late payments are such a problem for SMEs, including:
- Late payments can make investment difficult – this is a particular problem for logistics and haulage firms where any investment is likely to be sizeable. A new truck can easily cost over £150,000. Even if it’s being leased, payments will have to be made and if these are missed owing to late payments from creditors it can prevent these potentially transformative investments from being made
- Wasted time – the Nat West survey showed that 31% of SMEs spent time chasing down late payments
- Damaged relationships – slow payments can harm relationships with vendors and clients. It can also create problems for the creditor in terms of keeping them waiting for payments while they wait to be paid
- Operation and reputational issues – if you can’t pay your suppliers they may refuse to supply you. If you’re a retailer with no stock or a haulage firm who can’t pay for fuel, your business is going nowhere. Also, word can get out that you’re a bad payer and customers and suppliers can refuse to work with you
- Bad debts –services, stock, loans, and staff taken on in the expectation of money that isn’t going to come in can leave a business in ruins
What Causes Late Payments?
There are generally acknowledged to be five reasons that cause late payments:
- Customers being left waiting to receive payment themselves – late payments have turned into a vicious circle for small businesses. ‘I can’t pay A until B pays me’ has become a familiar refrain
- Inconsistent payment terms in contracts – a supplier may think they are on 30 days whereas the customer thinks they are on 45 days
- Invoicing and admin errors – invoices have errors in them or get lost/are overlooked. Payment systems fail or payments are missed off payment runs. You can try using automated accounting and invoicing systems to improve accuracy and send reminders
- Disputes – payment disputes are on the rise in the UK. Often these arise from either disputes regarding the quality of work that’s been done or that one party feels that it hasn’t been completed
- Market conditions – higher interest rates, inflation and wage increases, a reduction in custom or unforeseen disasters such as the pandemic can lead to firms having to keep as much cash on hand as possible
What Can Be Done To Solve The Issue Of Late Payments?
The Chancellor has announced that in the Autumn Statement she will introduce ‘tough new legislation’ to address the issue of late payments. Rachel Reeves has outlined plans to force all large companies, not just government contractors, to report on their payment practices and demonstrate they are prompt payers. While this should help small firms get paid on time there are some things individual businesses can do to get paid more quickly:
- Keep talking, keep chasing – the most effective way is to just keep asking for payment. It can be time-consuming, but persistence pays. To save time draft an email template, drop in the appropriate details and send it on a regular basis. Try and show some understanding when dealing with your creditor as they may well be in the same boat as you
- Make sure your payment terms in contracts are consistent – don’t assume, check and get in writing that you’re both on the same page in terms of payment terms
- Invoicing and admin errors – check invoices have been sent, received and are correct. This is especially important when dealing with new clients. Using automated accounting and invoicing systems can improve accuracy and send reminders
- Offer early payment discounts – it will cut into your margins, but cashflow is a far bigger business killer than margins
- Ask for part/all payment upfront – not all clients will want to do it, but if you explain you have upfront costs – stock, fuel, wages, etc. – then they may agree to at least a partial upfront payment that will keep your business’s head above water
Eradicating Late Payments: A Silver Bullet For Derbyshire’s SMEs?
There’s no doubt that eradicating late payments for Derbyshire’s SMEs would provide a massive boost to this £5 billion-pound sector. For sectors such as haulage, logistics, retail and hospitality, all of which are facing significant cost issues at present, it could make the difference between survival and failure. The Government has large firms in its legislative sights but to eradicate the problem all businesses need to do what they can and play fair, pay fair. Inter-SME late payments are a multi-billion-pound sector in itself, one that we as SMEs can address ourselves.
Like Some Small Business Insurance help?
If you’d like some help getting the right business insurance, then please get in touch with Coversure Castle Donington. As one of the UK’s leading independent SME insurance brokers, we can help you get the protection your business needs. You can call us on 01332 320540 or email Coversure Castle Donington.
