A new report from Hitachi Capital shows the damaging effect that the late payment culture is having on small businesses. In the last 12 months 31% of SMEs have had problems with late payments, which has cost them at least £10,000.

The research highlights that the late payment culture is having a long-term impact on the UK economy. The estimated cost to UK SMEs over the last 12 months is £51.5 billion. However, the true extent of the problem could be much higher.

 

SMEs feeling the squeeze

The problem of late payments has led to more than a quarter of SMEs (27%) feeling a squeeze on profits. 12% of the businesses questioned even had to defer paying staff – this equates to an estimated 1.95m employees not being paid on time.

With small companies already struggling to maintain a healthy cash flow, this new report simply highlights the extent of the problem. It even has an impact on personal finances. Around 40% of those asked had resorted to using their own money to plug gaps in the business’ finances. 80% of these people had put their personal savings into the company to help keep it operating.

 

Reducing the risk of unpaid invoices

The figures released in the report show that there is a vital need for small businesses to maintain a healthy cash flow across the year. This helps to limit the risk of unreliable customers. In the last year, almost three-quarters of SMEs had a customer who failed to settle invoices within the agreed terms.

It’s important that businesses check out the financial position of a customer before starting to work for them. 21% of SMEs questioned had refused a contract simply because the customer was an unreliable payer or wanted unfavourable payment terms.

Many small businesses are unaware of the facilities available to them to mitigate the risks of late-paying customers. This includes invoice finance services and other external funding options, which can offer businesses a safety net when cashflow is tight.

Robert Gordon, CEO of Hitachi Capital UK, said: “An imbalance of power between clients and suppliers, often driven by larger players abusing their position, has led to a widespread late payment culture that is damaging UK SMEs. As our research has shown, if we let this go unchecked, huge numbers of businesses will continue to experience cash flow pressures at a time of wider economic uncertainty.

“This has ramifications not only for SMEs, but for entire supply chains and a fair, competitive and supportive business environment is critical for the country’s wider economic success. It’s imperative that we not only acknowledge this issue and crackdown on late payments, but also take practical steps to ensure businesses are given the required support and penalties are put in place for the worst offenders.”

 

Government help for SMEs

The research indicates that the majority of small business owners are in favour of tougher government legislation to reduce the late payment culture. 68% are in support of legislation to make it illegal for businesses to miss a payment deadline. In addition, just over half of those asked (57%) spend almost one day a week chasing up outstanding invoices. This shows that the problem of late payments is having an effect on productivity levels.

Measures proposed by the previous Government to assist small businesses are currently on hold. This includes increasing the powers of the Small Business Commissioner to enforce best practice, as well as making revisions to the Prompt Payment Code.

 

Business debt recovery

At CEA Ltd we can assist your business to recover unpaid invoices. We work with businesses across the country to collect their invoice debts and help them to maintain a healthy cashflow. Contact our debt collection team today to discuss your requirements and starting recovering money that is owed to you.