B2B Payments

UK SMEs Losing Hope For A Late Payment Victory

By now, it is no secret that the U.K. is in the midst of a late payments epidemic. Small businesses are speaking out against unfairly long payment terms, major corporate buyers are being pressured to improve their payment practices, and policymakers are exploring new ways to improve the matter.

But what is most concerning about this saga is that despite these efforts, the instance of late payments in the U.K. is not decreasing.

The U.K.’s Federation of Small Businesses issued a press release Thursday (March 19) that calls attention to how the government’s methods are falling short to shorten payment terms for SMEs. The group released the results of a survey among its business members and found a troubling trend: the majority of businesses (79 percent) are not convinced that the Prompt Payment Code, a government-backed effort that sees corporations pledging to pay their suppliers on time, will actually lead to prompt payments. It’s a revelation that suggests the U.K. has a long road ahead to combat the late payment plague.

Numbers Don’t Lie: The Code Isn’t Working

SMEs’ doubts over the ability of the Code to improve B2B payment times aren’t without merit. While the U.K.’s Department of Business, Innovation & Skills reported two years ago that the number of FTSE 350 companies that have signed the Prompt Payment Code had tripled, just this past week studies have shown just how exacerbated the late payment problem has become for SMEs.

The FSB’s research found that nearly 40 percent of businesses reported being paid on terms longer than 30 days; 43 percent said they have had to wait more than 90 days past payment due dates to actually receive funds. When asked why, 34 percent of those surveyed said that the invoice payment terms were extended by the buyer without permission.

What’s more, almost half (49 percent) of the businesses reporting these late payments said that no excuse or justification was given by procurers as to why their invoices remained outstanding for so long.

“If businesses do not get the money they are owed, they may not be able to pay their staff, invest in their business or pay their own suppliers,” said John Allan, the National Chairman of the Federation of Small Businesses. “There is a knock-on effect right down the supply chain, which undermines the U.K. economy as a whole. Late and poor payment practices are holding back our economy and pushing potentially successful firms out of business.”

A separate study conducted by the Confederation of British Industry found that nearly $49 billion outstanding payments remain for U.K. businesses, many of which are SMEs, as a result of late payments. According to reports, financial services group Close Brothers found that in the Northeast alone, nearly 40 percent of SMEs are struggling because larger corporations are withholding payments to them.

The majority of businesses surveyed (68 percent) said they are experiencing cash flow difficulties due to late payments, and up to 16 percent of businesses reported that late payments are posing a threat to their ability to do business.

“The amount of money that SMEs are forced to write off as a result of late payments is staggering and surely hindering business growth,” said Close Brothers Invoice Finance North East regional sales director Rob Hatfield. “We found that large corporate organizations were judged the worst offenders by 53 percent of SMEs in the North East, closely followed by the public sector for almost a third of firms.”

The FSB’s Allan spoke directly to these failings of the Prompt Payment Code to lead to any improvements of these issues. “Despite increasing public outrage at the mistreatment of smaller suppliers by their larger customers, the U.K.’s payment culture continues to get worse,” he said.

The Diageo Drama

Diageo, the world’s largest spirits producer and a leading beer and wine producer, is one of those major U.K. conglomerates that signed the Prompt Payment Pledge more than two years ago.

The Telegraph, which has followed the late payment saga and challenged major corporations to be held accountable for their misconduct with small suppliers, obtained a letter reportedly sent by Diageo to its suppliers earlier this year that warned that it would extend its payment times from 60 days to 90 days as of Feb. 1, citing a need to improve its cash flow.

Following backlash from both the public and small businesses, Diageo revealed last week that it would abandon its plans to extend payment terms with suppliers. “Diageo values its long term and collaborative relationships with its suppliers,” the corporation told BeverageDaily.com following the decision.

Diageo’s change of heart is a minor victory for the little guys, but highlights a broader concern: even with Diageo’s vow to pay its suppliers on time, the corporation still had the power to extend payment terms. It’s a challenge faced by many small suppliers with their large corporate buyers, experts say.

What Businesses Can Do

The Prompt Payment Code is, at least, a vow of support for small suppliers by federal officials in the U.K., and an acknowledgement that late payments are hampering the ability for SMEs to operate and grow. But there is a long way to go for major corporations to begin paying their suppliers on time in a consistent manner, and that process may come from a variety of methods.

The Federation of Small Businesses is calling for an independent investigation into the matter by U.K. authorities, and its survey shows businesses would back such a plan. But the FSB’s survey revealed that small businesses may be able to improve their ability to get paid internally. When asked why these businesses got paid late, nearly one-third (31 percent) said that the invoice never made it to the buyer, and more than one-third (35 percent) explained that internal invoice processing issues were to blame.

These figures are key insights into ways small businesses may be able to improve their operations. Innovators are increasingly developing new technologies aimed at small businesses to digitize their invoicing procedures, which has been shown to reduce error and improve efficiency.

But the burden of solving the late payments issue cannot land solely on the small suppliers. Lawmakers are exploring ways to improve the situation and have proposed the Small Business, Enterprise and Employment Bill, which is presently being reviewed by the House of Lords. Officials are also exploring a mandatory payment reporting process that would require businesses to provide information regarding invoices they pay late. But critics argue that, much like the Prompt Payment Code, this mandate would be a self-governing process with no third-party oversight to ensure compliance.

The FSB’s research suggests that small businesses will not settle for a mere promise among major corporations to pay their suppliers on time, as 60 percent of businesses would support an independent federal inquiry into late payments.

Fixing late payments in the U.K. will almost certainly require effort on all fronts: SMEs, large buyers and the government. And, according to the FSB’s John Allan, the task will not be successful unless there is a fundamental change in how U.K. corporations do business. “To strengthen the Prompt Payment Code there needs to be a cultural shift to improve payment practices,” he said.

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