Late payments starting to take toll

Despite UK government efforts to increase penalties on firms who fail to pay suppliers on time, the impact on small businesses is increasing, agree industry advocates and a market participant.

“[Recent government proposals] are giving big customers the out to say, ‘no, we don’t have unfair payment practices, we’re just useless. We’re not systemically mean, we’re just a bit hopeless,’” says Louise Beaumont, co-chair, Open Banking Payments Working Group, techUK.

“It won’t change behavior and so it doesn’t give any small business a sense of deep relief right now. Most small businesses won’t even know that this has happened because it doesn’t impact them, and it is not going to change the behavior of their customers,” she says.

“How long have [large companies] got to prove that they are actually being mean to their suppliers and it is not just them being hopeless. There are lots of get out clauses here still.”

On June 19 small business minister Kelly Tolhurst revealed proposals to give greater power to the Small Business Commissioner to enforce fines. The proposals also look to hold company boards accountable for payment practices.

Additionally, to encourage the development of technology to assist with invoicing, payment, and credit management, a fund competition of up to £1m has been set up. The fund’s objective is to “build evidence on how to encourage SMEs to adopt productivity boosting technology.”

“The vast majority of businesses pay their bills on time, with the amount owed in late payments halved over the last five years,” said Tolhurst in a press release.

However, the Federation of Small Businesses (FSB) estimates 50,000 businesses close each year due to late payments, costing the UK economy £2.5bn.

Research published in July by Xero and PayPal indicates 37% of UK business owners have thought about closing their firms because of cash flow issues created by late payments. Moreover, the amount of late payments increased 17% in February compared to the same month last year.

“We have to support small businesses because they are a fundamental part of our economy. The fact that they are not getting paid is impacting them, but it is also impacting our overall economy,” says Donna Torres, Xero’s head of small business.

According to findings by Bottomline technologies published in June, 92% of respondents admitted to paying suppliers late. While 40% admitted that their business had inefficient Accounts Payable processes.

In 2017, the UK government introduced the Reporting on Payment Practices and Performance Regulations in an attempt to curb late payments. This requires the UK’s largest companies to report twice annually on their payment practices, policies, and performance. The rules state that failure to publish a report will result in a fine.

But the regulation has failed to make any real impact, according Beaumont.

“There is guidance from [UK] government but it is fairly toothless, and it doesn’t take into account the commercial realities of life. The government has set a standard. They seek to lightly embarrass corporates for paying late. But, the reason that companies do it is to protect their own liquidity and they want to horde as much cash as possible,” says Beaumont.

“The duty to report regulation from the government came into force in 2017, but we are now into 2019 and it has not changed the behavior because as I say, it’s just toothless,” she says.

For Lorence Nye, senior policy advisor at the Federation of Small Business, a change to the powers of supervision for the role of Small Business Commissioner would be welcome.

“The small businesses commissioner to be frank doesn’t have a way to punish poor payments. They can name and shame, but how effective that is, is not entirely clear,” says Nye.

“The small business commissioner has a lot of potential if they are given the right tools,” he says. “We advocate for the code adjudicator’s method of essentially having a stick there so they can fine people for malpractice, which would eradicate the benefits of withholding payments.”

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