Credit and Finance, News and Insight
Nearly a quarter of SMEs being pushed into financial crisis due to late payments
Posted on by Cindy Yip
Estimated read time: 3 mins
Recent research revealed that half of all invoices owed to small firms are overdue. Nearly a quarter of Britain’s small and medium sized enterprises (SME) are being pushed into a financial crisis due to late payments. Out of 1,000 company owners interviewed, 23 per cent reported being close to insolvency due to unpaid invoices. When the average SME is owed £40,857 in unpaid invoices and £20,937 of this is overdue; this could translate to an eye watering total of £212 billion considering there are a total of 5.2 million SMEs in the UK.
Being paid on time can make all the difference between having a successful month of trading and cash flow and a rocky month with negative cash flow. Large companies were the biggest culprits when paying SMEs late, with medium sized firms being next and then public sector firms. With cash flow being so tight in SMEs, companies that are paying late could be stifling the growth and productivity for them.
In another survey, more than half of those that were affected by late payments said they had to write off up to 10 per cent of their turnover in the past 12 months with over a quarter writing off between 10 and 25 per cent. 51 per cent of companies said cash flow, working capital and late payments were their main business concerns with as many as 15 per cent citing as threatening their ability to trade.
Late payment doesn’t just affect cash flow but also the owner’s motivation and confidence to invest and hire. If late payers are restricting the cash of the company, owners’ will feel inclined to build up as much reserve resource as possible for when there’s a bad day. Employees and employers time is also wasted with approximately 130 hours a year being spent in a typical company to chase invoices rather than using this valuable time to chase sales, not to mention it can lower morale having to do such tedious tasks.
As SMEs represent one-third of the total private sector turnover, restricting their ability to grow and invest is ultimately restricting the growth of the UK economy as a whole. This hinder of growth on SMEs and the UK economy as a whole has been recognised by the government. New laws introduced in the Small Business Enterprise and Employment Act 2015 will require UK’s largest companies to report on their payment policies and practices. The small business commissioner can name and shame companies that are persistently delaying payment to their suppliers.
There’s still a lot of work that needs to be done yet to minimise the amount of bad debt but hopefully more steps will be taken in the future to support the growth of SMEs and tackle the problem of late payments.