Half of UK’s smaller businesses are owed £17.5bn in late payments

A detailed analysis of how the UK’s small businesses were impacted by Covid-19 and other economic challenges in 2020 has been published in a joint study by leading payments authority, Pay.UK, and Europe’s largest credit management membership body, the Chartered Institute of Credit Management (CICM).

The research, which set out to track how many organisations suffered from late payment and the impact this has on their future sustainability, found that more than half of all of the country’s smaller businesses suffered from late payment, facing a collective debt burden of £17.5bn.

A significant 51% of UK small and medium size enterprises (SMEs) were affected by delays in receiving payments for goods and services; that’s broadly in line with 2019 data which showed 54% of SMEs experiencing late payments and well above the figures reported in 2017 and 2018.

When it comes to a regional split, Scottish businesses are the worst affected. Three in five of those surveyed (60%) have experienced late payments, with Wales at 59% and Northern Ireland 57%.

And, while the overall amount owed to the country’s SMEs fell from £23bn in 2019 to £17.5bn in 2020, the total remains considerably higher than the £12.9bn late payments debt reported in 2018 and 2017’s £14.2bn.

On a more positive note, the average overdue amount dropped to just under £20,000 compared with 2019’s £25,000, although it isn’t clear if the reduction in overall business activity throughout the pandemic had an impact on those numbers. The average overdues also need to be seen in the context of feedback that says the futures of 59% of SMEs would be threatened if late payment volumes reached £50,000 or more.

The research, carried out at the end of 2020 by the people responsible for Direct Debit, Faster Payments, and cheques in the UK, also showed that UK SMEs are paying out billions to collect money they are legitimately owed. Almost a fifth (18%) of those waiting on funds spent more than £500 per month chasing payments in 2020, adding up to a hefty £5bn total bill for the UK’s smaller businesses.

And SMEs are often waiting a long time for important invoices to be settled; three quarters of those experiencing late payments receive funds one month or more over agreed terms, and 27% are waiting longer than two months. This could go some way to explaining why a third of small businesses experiencing late payments have to rely on bank finance, and why one in five resort to reducing directors’ salaries in order to manage cashflow.

The worst offenders for paying late are businesses in the private sector, accounting for 59% and £10.9bn of overdue invoices. But what is most interesting, especially given the noise made by various small business organisations that would suggest the problem is restricted to large businesses alone, is that more than three quarters of the outstanding private sector debt (£8.3bn) is owed by one SME to another! Corporates owe £2.6bn, while late payments from consumers tot up to £4.4bn (24%) with the public sector at £3.1bn, or 17%.

Dougie Belmore, Pay.UK’s chief payments officer says that 2020 brought many challenges: “Notwithstanding the challenges of Covid, I find it disquieting that more than half of the country’s smaller companies are struggling with late payments. Right now, there are more ways than ever to settle a bill and I’d encourage any business dealing with overdue invoices to make payment as easy as possible. Offering a choice of payment options or dates, or moving to automated collection with Direct Debit, could help to remove perceived barriers, and may go some way to helping overcome the problem.”

Sue Chapple, chief executive of the CICM, says that late payment cannot be put solely at the foot of larger corporates: “Certainly the feedback we are receiving from members, many of whom hold senior roles in major PLCs, is that they are taking significant steps to protect their supply chain, and some are even insisting on paying supplier invoices within 14 days or less, regardless of longer terms and conditions.

“Small businesses can take action to reduce late payment volumes by invoicing correctly and on time and adhering to any specific requirements their customers may have (e.g a purchase order number) to ensure they do not fall foul of a simple process or risk their invoice being in dispute. They can also look at simple techniques such as offering small discounts for early settlement.

“Whereas there are, of course, many businesses who are wanting to pay late – partly because they, in turn, are trying to manage their own cash position – there are many more who value their supplier relationships. Agreeing terms and conditions from the outset, and employing professional credit management best practice, can make all the difference in getting paid and keeping the cash flowing.”