Late Payment: Is The Problem Getting Better Or Worse For UK SMEs?

According to the Federation of Small Businesses (FSB), on average, UK small businesses are owed £6,142 in unpaid invoices, mostly as a result of larger firms dragging their feet when it comes to paying for goods and services supplied.

The FSB says it has been “highlighting the impact of late payment and supply-chain bullying” for 10 years. According to its research, 37% of small businesses in the UK have run into cash flow difficulties as a result of late payment, with 30% having been forced to use an overdraft as a consequence. According to the FSB:

“If all payments were made on time, 50,000 more businesses could be kept open each year, whilst the UK economy would receive a £2.5 billion boost”.

Small Business Commissioner

For some time, the government has acknowledged the malignant problem of late payment damaging UK SMEs and has taken steps to try to tackle it. In 2017 it created the post of the Small Business Commissioner, launched to “drive a culture change in payment practices, to ensure that small businesses are treated fairly” when it comes to getting paid.

Birmingham-based former small-business owner and ex-Conservative MP, Paul Uppal, is the current Small Business Commissioner. His office “considers complaints from small businesses about payment problems they are encountering concerning their larger business customers, making non-binding recommendations on how the parties should resolve their disputes”.

The Commissioner’s website provides guidance to small businesses on how to deal with an unpaid invoice, as well as a handy online calculator so small firms can work out how much interest they can charge large businesses (8% plus the Bank of England base rate is a statutory right). Small firms can also find out how to complain to the Commissioner about late-payers.

What is the average time UK companies take to pay an invoice? 

Regulations were also introduced in 2017 that require large businesses to publically report (twice a year) their average supplier payment time, giving small firms the opportunity to better decide who to do business with. Small firms can now visit government website GOV.UK to check how long a large business takes to pay it suppliers and what percentage of invoices it doesn’t pay on time.

Towards the end of 2018, Lloyds Bank analysed payment practices reports published by the Department for Business, Energy & Industrial Strategy. At the time, 7,010 companies had submitted 8,889 reports, but only 1,350 companies had reported more than once since the legislation was introduced.

So, what were Lloyd’s Bank’s key findings and what might it tell you about your large customer’s payment habits?

Well, the average payment time was 37 days (still seven days more than the typical payment terms for a small business), and:

• 2% of large businesses took up to 80 days to pay
• 12% took between 50 and 59 days
• 19% took between 40 and 49 days and
• 25% took between 30 and 39 days
• 11% took between 10 and 19 days.

Slightly more than half (53%) of invoices were paid within 30 days, with 32% paid within 60 days and 15% paid later than 60 days. Almost a quarter (23%) of late payments were up to nine days late; 17% were 10-19 days late; 15% were 20-29 days late; and 13% were 30-39 days late. Very few (2%) were between 90 and 100 days late, while 3% were 80-89% and 5% were 70-79 days late.

How do payment practices vary across regions and sectors?

Average days to pay and percentage of late payments were lowest in London (34 and 30%), Scotland (37 and 31%) and Southern England (38 and 32%). Companies in Yorkshire and the Humber region reported the longest average time to pay (43 days) followed by Northern Ireland (41 days). Companies in the Midlands, Wales and Northern Ireland reported the highest percentage of late payments (all 34%).

Sectors with more complex supply chains (eg engineering and manufacturing) reported longer average payment times and more invoices paid beyond agreed payment terms. Average payment times were longest in the packaging sector (59 days), with more than half (53%) of invoices not paid within agreed terms. This compares to an average of 27 days in the financial sector, with just 24% of invoices not paid before due.

What impact does company size have on time it takes to pay? 

Company size (by revenue) does not appear to be a significant factor in the average time to pay, the report found. Companies with revenue of less than £50m had an average payment time of 36 days, compared to 40 days for those with revenue of £200m-£250m. The very largest companies, with £500m+ revenue, reported an average payment time of 38 days.

Just 9% of large companies reported being a member of a payment code (the government introduced the Prompt Payment Code in 2008). Companies with electronic invoicing systems are more likely to make payments on time, although their average payment time was still 40 days. Only 18% of them pay more than 50% of their invoices late, compared to 23% of those that do not offer electronic invoicing.

The Lloyds payment practices report also found that only 1,135 companies reported twice and 209 had reported three times, with numerous companies having missed subsequent requirements to report following their initial submission, which doesn’t bode well for the future or the cash flow of many small firms.