The level of late payments in the UK has escalated to such an extent that combined with trade credit, late payments represent the UK’s single largest source of credit in the UK economy, 20 percent higher than outstanding bank credit. According to a leading trade credit group, the sums lent to UK businesses by suppliers in the form of late payments are getting seriously out of hand, posing a serious threat to the UK economy as a whole.
The problem posed by late paymentsIn the last year alone, late payments in the UK meant British businesses were made to wait for as long as six months for payments worth a total of £46bn. For companies in financial difficulty because of clients not paying on time, business loans are available from Everline. Check the link to jump to their ‘business loans explained’ page for help and adive. Small and medium-sized enterprises (SMEs) were hit particularly hard, accounting for £40bn worth of late payments, up from £30bn in 2013. One real cause for concern is the fact that SMEs, which are disproportionately affected by late payments, are more susceptible to the cashflow problems this scourge can cause.
The prompt payment codeThe prompt payment code was introduced as a method of encouraging and promoting timely payments between organisations and their suppliers. The code, which is voluntary, currently has 1,500 signatories, representing 60 percent of the UK supply chain, so wide gaps in coverage still exist. To bridge this gap, more and more SMEs are turning to the free company checks, which allow suppliers to have a closer look at an organisation’s payment history before they agree to supply their services.
What can suppliers do?A spokesperson for the trade credit group that conducted the research, said: “Trade credit is being used as a blunt instrument by many companies, with outdated practices poorly adapted to today’s new economic environment.” The problem for small suppliers that are financially reliant on contracts with large corporations often have little choice other than to offer very generous payment terms, which can stretch to 90 days. However, in many cases even these terms are not met. When corporations fail to meet payment terms there is often very little SMEs can do.
The widening lag between delivery and paymentThe study also found that the delay between the delivery of goods and the receipt of payment is widening. In 2012, UK companies gave fellow businesses £75bn more credit than they offered to their customers. One of the most worrying signs is that this behaviour is often indicative of an increased risk in insolvency, as companies pay creditors more slowly to maintain a high level of working capital in their business. The £75bn difference between the level of b2b and b2c credit represents a radical shift in trade credit management and risks undermining the health of the UK economy as a whole.
The source of the problemData from the Bank of England sheds some light on why more businesses are intent on hanging onto their money for as long as they can. While advertised interest rates are currently favourable for larger corporations, the amount the banks charge smaller businesses often far exceeds their advertised rates. With credit increasingly expensive and some business overdraft facilities costing as much as 2.4 percent a month, many businesses are being left with little choice other than to stretch out their payments to trade suppliers and hang onto their cash for as long as they can.
What’s the solution?Many SMEs believe that making the prompt payment code mandatory would be one method of effectively reducing the level of late payments between UK businesses. The government is also legislating as part of its small business, enterprise and employment bill to force corporations with poor payment records to publish their payment terms, effectively shaming them into cleaning up their act. Is your business struggling as a result of late payments? Are the worst offenders typically SMEs or large corporations? We’d love to hear from you on this topic, so please leave your thoughts in the comments section below. Richard Walker is a freelance business consultant and part time small business and finance writer who produces articles for some of the UK’s most authoritative websites.