The UK government has become the latest to address a bane of many small businesses: late payment. The average small and medium-sized enterprise (SME) in the UK is owed more than £30,000 with some £32bn outstanding in total.
“It’s enough to force a company into insolvency,” Sajid Javid said in his first speech as business minister in May.
In 2008, 4,000 UK businesses became insolvent as a direct consequence of late payment, according to the government.
So it is introducing a Small Business Conciliation Service to mediate between creditors and debtors. It is modelled on an Australian system.
While SMEs can charge penalties and interest for late payment, they fear losing business from big customers in retaliation. Just 10 per of businesses have considered using late payment legislation: 22 per cent have ended a business relationship with a customer because of continued late payment.
While the average declared payment time in the UK is 25 days, in practice it is 44 days, the government says. Some EU countries are even worse. Spain averages 97 days. Finland is the quickest, with a 27 day turnround.
“The conciliation service will be busy,” says Prof Nick Wilson of Leeds University Business School. He is an expert on credit management and says too many British businesses simply survive from month to month. “They have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”
John Allan, chairman of the Federation of Small Businesses lobby group, says: “Small businesses often have the law on their side, but find that accessing the legal system is complex, time consuming and expensive. A properly constituted conciliation service should help with this and go some way to addressing the UK’s poor payment culture.”
A third of companies report that they have sought external finance to cover gaps in cash flow caused by late payment. The FSB says that this has led to £180m in debt interest charges
Prof Russel Griggs, the independent external reviewer of the banks’ Appeals Process, reported that in the financial year 2012-2013, 48 per cent of declined finance applications over £25,000 were rejected on ”affordability” grounds — the ability of an SME to service the debt from its existing cash flow.
In fact, Prof Wilson says, large British corporates are a net provider of credit to SMEs. He has analysed more than 1m company balance sheets and found that there is a net £65bn in trade credit extended to SMES. “It appears that UK companies are reliant on trade credit to fund growth in the post-recession period,” he says.
The British government has also legislated so that, from April 2016 the UK’s largest businesses have to detail their payment practices and timescales in their accounts.
Many big companies have increased payment lengths in the past few years to as much as 120 days.
Sage, an IT provider, has become the first FTSE 100 business to commit to 30-day payment terms.
Brendan Flattery, president of Sage Europe, says late payment was the most debilitating challenge facing small businesses. “As small business owners struggle to keep their own companies solvent at the expense of paying their suppliers on time, this creates a domino effect on the whole supply chain.”
The need to improve cash flow has seen a big rise in asset-based lending, where money is borrowed or advanced against invoices.
One company is betting that technology could end the scourge of late payment for good. Tungsten Corporation is a software provider that allows electronic settlement of invoices. It advances money to suppliers who upload on to its network and collects from those they invoice, taking a cut.
Tungsten serves 280 of the US Fortune 500 and 67 of the FTSE 100. It enables suppliers to submit tax compliant e-invoices in 47 countries, and last year processed transactions worth more than $187bn for organisations including Aviva, Cargill, Lufthansa and IBM.
Some countries are specifying that all invoices above a certain amount must be filed digitally in a pre-specified format. Mexico did so this year and Argentina and Brazil are set to follow suit.
Edmund Truell, vice-chairman and founder of Tungsten, says: “Getting paid — and on time — is vital for working capital. Our network can do that. We are scaling up very fast.”
He said that once companies are approved, there is no risk of fraud, which holds up many invoice payment approvals. However, it has taken longer than expected to put businesses on the system.
There are signs that things are becoming a little easier for companies as banks, recovering from the financial crisis, return to lending, easing their capital position.
Sir Michael Bibby, managing director of Bibby Line, which operates a European invoice finance business, says demand remains depressed, so margins are being squeezed.
He says: “The banks are lending again. It is a good time to be a small business looking for funds. The market is competitive and people will lend at low rates.”