Tag: late payment

Why Late Payments are an SME’s worst nightmare

Author
Angus Dent
Date

The Market Invoice presentation on late payment brought back into focus the traditional scourge of the SME. Whilst I think that invoice finance and factoring are definitely not the way to finance a business struggling with late payment, the presentation certainly made interesting viewing.

I thought I would add a few points to prove just how damaging late payment can be for SMEs, but first it is worth stressing that a term loan from an alternative finance provider with a light touch approach is the best solution for an SME suffering with late payment from their debtors. A term loan through an alternative finance provider can help SMEs facilitate finance quickly, without hassle and with tailored solutions. The banks’ turnaround time often takes one year plus; through AltFi borrowers can receive the funds within a couple of months. As the banks increasingly funnel more business to AltFi providers, the industry is slowly gaining the respect it deserves. However, this should not extend to invoice financing. It is the crack cocaine of finance, incredibly difficult to shirk and once the cycle is entrenched an SME will find it very hard to escape from.

Back to late payment…

Small and medium-sized enterprises (SMEs) were owed £26.8bn as of July according to Bacs. In attempting to recover this debt, these businesses are spending £10.8bn a year. This downward spiral causes many SMEs to go into panic mode, fuelled by the fear of losing reputation and offending customers when chasing payment. And as approximately 99% of businesses nationwide fall into the category of SMEs, this is a major drag on the economy.

According to a Zurich poll one in five SMEs reported that they are owed more than £25,000, one in 10 more than £100,00 and more than 43,000 SMEs are owed more than £1 million. The affect for an SME? Expansion in terms of cash flow and hiring staff is inhibited and most importantly up to 130 hours of valuable time is wasted per year chasing invoices which could be used effectively elsewhere.

Existing legislation is supposed to provide SMEs with assistance; late payments can be recouped according to the Late Payment of Commercial Debts Act (1998). From an outside perspective this may seem like the answer to an SME’s problems; however 58% of SMEs say that they will not claim compensation for any late payment even though they are legally entitled to this. Once again the fears of the losing business and ruining relationships far outweigh the immediate compensation in terms of cash. The solution? Everybody pay on time – fat chance. The tonic to sooth the pain can come in the form of alternative finance providers such as peer-to-peer lenders who understand the needs of SMEs and can provide practical solutions to real problems.

The Problem of Late Payment

Author
Angus Dent
Date

[avatar]

Late payment is one of the greatest challenges faced by this country’s small businesses. Not only does it limit their ability to grow by choking their cash flows, it also causes employees to waste time chasing payment which could otherwise be spent more productively.

The government knows this, and changes to late payment legislation stand as the latest addition to their basket of policies aimed at easing the burden shouldered by small businesses. Their objectives here are commendable, but as I wrote recently when discussing their efforts to tackle red tape, getting cold hard results may prove difficult.

The ‘Prompt Payment Code’ set up by the government seven years ago has certainly not had the desired effect. Signing up to this voluntary measure means that a business is bound to certain payment terms, but, somewhat predictably, only 1,700 businesses have got involved. More recently, the EU launched their Directive on Late Payment in an attempt to instigate a 60 day payment window. But a loophole allowing longer payment terms if the supplier agrees has hamstrung this policy’s potential. Food giant Mars have reportedly capitalised on this loophole, increasing their payment terms from 60 to 100 days and using their market power to coerce suppliers into agreeing, or facing the possibility of losing contracts.

late pay

There are legal options available to the victims of late payment; businesses can charge interest to their debtors, for instance, but only 10 per cent of SMEs are reported to have used this for fear of losing business. With the IT Firm Sage estimating that some £55bn is currently owed to the UK’s SMEs, there is clearly a need for a more workable solution.

The government’s newest initiative is named the Small Business Conciliation Service and uses an Australian model as its precedent. The Service will be used to mediate disputes between debtors and creditors and thus smooth the payment process.

Yet even if this Service becomes a tremendous success, late payment will not disappear overnight. And as Professor Nick Wilson of Leeds University Business School points out, at the moment “[SMEs] have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”

But as we know, the banks aren’t lending. So where should SMEs look? For many businesses, the burgeoning alternative finance sector could be the answer.

Miserable Bastards

Author
Angus Dent
Date

[avatar]

It’s probably a horrendous crime in the blogosphere to extract commentary produced by others, but this piece from Martin Vander Weyer which was first printed in the Spectator is just too close to our hearts at ArchOver to be missed and deserves to be read by a wider audience:

My New Year slogan was ‘Pay up, you miserable bastards’, in reference to the practice of late payment of creditors which I called ‘the bane of modern commercial life’ — but I’m sorry to say that the leaders of some of Britain’s biggest businesses have collectively decided to laugh in my face. Diageo is extending its payment terms from 60 to 90 days; Heinz to 97 days; Mars, Mondelez (-parent of Cadbury) and AB InBev (brewer of Stella Artois and Boddingtons) to 120 days. In the industries which these giants dominate, suppliers are typically a fraction of the size of buyers, and have correspondingly higher borrowing costs; and the bigger the company, the more likely it is to be sitting on hoards of cash. The Federation of Small Businesses estimates that £40 billion is owed to its members as a result of late payments; as of last October, FTSE100 companies held net cash of £53 billion. 

There are many differences between the UK and Greece, and one of them, crucial to economic revival, is the vigour and resilience of our small and medium-sized business sector — which is being squeezed by big-corporate fat cats who use each other as benchmarks for commercial brutality. It’s nothing but a damned disgrace.

Read the whole article in the Spectator at:

http://www.spectator.co.uk/columnists/any-other-business/9425951/austerity-really-is-a-virtue-whatever-the-greeks-think/

As you’d expect it’s also doing the rounds on Twitter.