The real cost of Small Business late payment

Small Business owners set to raise prices

The financial impacts from COVID is forcing many SME’s into bankruptcy. One of the major instigators of this is the late payments issue, which has increased by 20% from last year, to £61billion. 

As the instrumental player in the UK’s economy, SME’s turnover turnover is estimated at £2.2trillion annually. Tackling the issue of late payments is critical in enabling small businesses to reach their maximum potential . Not only does it improve their growth, but the growth of the UK economy. Late payments are debilitating to any Business, large and small.

Over 50,000 SME’s cease trading every year due to this issue and the pandemic is fuelling a worsening of this, resulting in untold damage to the entire UK economy. SMEs are currently owed £61billion in late payments, a 20% increase compared to this time last year.

The shocking impact of late payment

The European Commission found that in the UK, 30% of businesses indicated that late payment had links to subsequent redundancies, compared to 35% of businesses in Germany; 28% in Spain and 25% in France. Based on the UK’s average salary of £29,600, that unpaid money could pay for businesses to hire more than two million people.

Late payments force many affected businesses to focus on daily activities rather than future plans for growth and expansion. As a result, the longer companies wait for payment, the lower the level of investment they make.

A survey from cashflow management system Penny Freedom has revealed that two thirds of the six million SMEs in the UK have at least one late payment on their books, with an average value of £15,370.

A month delay in being paid would reduce capital spend by 1.2%, and could lead to reduced profitability for as long as five years thereafter. There is clear evidence that late payment is linked to an inability to access affordable finance, due for example to an inability to demonstrate to lenders a clear cash flow.

A recent exclusive survey with YouGov to better understand the situation among business-to-business SMEs across the UK, surveying a sample of 500 businesses with up to 49 employees, 68% confirmed they regularly experience late payments.

A massive 62% of SME’s spend time each week chasing overdue invoices. That equates to four million businesses (and 1.7 million VAT registered businesses) struggling to get paid for products and services they’ve delivered. The time, energy and resources drain that this causes is significant, and the effort could be spent instead growing the business. And there’s no doubt that the pandemic has made this dire situation worse, with increased levels of debt, reduced cashflows and some larger organisations looking to retain cash themselves – even freezing payments for some small suppliers.

It is evident that SME’s must secure efficient invoicing processes. There are many cloud accounting and automated invoice chasing software services available. Repeated late payers must also appreciate the risk to their reputation and operations. Should their suppliers severe ties, this can present challenges to them in turn. It is critical to acknowledge that while larger enterprises have the resources to absorb debt, SMEs don’t, and they become the hardest hit as a result.

We are witnessing an increasing inability for SME’s to pay overheads on time, difficulties paying staff salaries and most worryingly, a heavy reliance on invoice financing to inject capital into their businesses. A major concern for small business owners moving forward is that access to finance may well become more difficult as we are faced with the financial impacts of covid.

The past 18 months have been horrendous for most small business owners. more than a third reporting an increase in the time customers take to pay invoices. The impact on those rejected financial loans may have major consequences on continuity as we move forward. The inability to hire people, expand premises or invest in new technology will make the future for SMEs very challenging.

The data highlights an increasing struggle when it comes to small business late payments. Despite the government outlining a route post lockdown, many organisations on the receiving end of late payments will struggle to survive after the crisis.

As many as 15% of the UK’s SMEs are rated ‘fragile’ and risk insolvency during the next four years as covid-19 state support schemes are withdrawn, according to research by Euler Hermes.

For now, businesses will need to combat the economic gales that are likely to slow the global recovery whilst simultaneously planning effectively for long-term growth. Supply chain disruption leaves many open to supply shortages and inflation which will limit growth.

Progress and taking action

The impact and damage of the issue of late payments goes way beyond the invoice in question. There is the hidden damage it causes and it dramatically affects productivity as well as the morale of the SME owners and work force.

It cannot be overstated how late payments damage the entire business environment.

2022 is viewed as a key year for the UK’s SMEs to recover and return stronger. Tackling the endemic issue of late payments should be any small businesses priority.

Legislation alone cannot fix it. Businesses must do their bit and take action where needed. Using a Professional Debt Collection Agency as a partner is viewed by many as essential.

A Debt Collection Agency’s specialism and expertise can identify ways to recover late payments quickly. It is an extremely cost effective way to deal with a tide of unpaid invoices.

Not all debt collection agencies are the same though and this is essential to remember. A Debt Collection service is effectively an extension of your brand so you will want to consider only working with Professionals.


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