You could be forgiven for thinking that thanks to the Brexit impasse, Britain’s legislators have more or less abandoned the messy business of actually running the country.
So here’s some news that may just possibly be welcome to owners of small and medium-sized businesses (SMBs). Under new plans announced last week by Small Business Minister, Kelly Tolhurst, large companies could, in future, be held accountable for their payment practices. Or to be more precise, companies that fail to pay their small suppliers on time could face fines or censure.
The measures aren’t quite over the line. While the U.K. government has committed to strengthening the powers of the Small Business Commissioner, the extent of those powers will only be finalized after a consultation process. However, last week's proposed measures suggest that in the not too distant future, the Commissioner will be able to demand full disclosure of payment terms and, when appropriate, impose fines. In addition, non-executive directors sitting on the audit committees of large company boards will be required to report on payment practices
In theory, these measures should serve to move the dial on late payment, making it a much less acceptable and common practice.
So What’s The Problem?
But how much of a problem is it? According to Kelly Tolhurst, the measures will address an issue that is already diminishing in importance. “The majority of businesses pay their bills on time,” she said in a statement. “The amount owed in late payments has halved over the last five years.”
Well, that's alright then. And yet, according to an analysis of customer invoices by accountancy software company FreeAgent, just 58% of invoices were paid either on time or within three days of their calendar deadline in 2018. So as FreeAgent sees it, late payment remains “a highly disruptive issue” for Britain’s small businesses.
Particularly if you run a business in Northern Ireland, where only 47 percent of invoices were paid on time. And while England as a whole has the best record, the late-payment capital of the United Kingdom is the city of Sheffield. Separate research by the same company finds that 95 percent of British businesses have been paid late at one time or another.
The Tip of Iceberg
Arguably the situation could be even worse, simply because a lot of suppliers are required to accept unfavorable terms in order to win orders from corporate customers. A large business may not be paying late whenever it honors an invoice three months after the delivery of goods or services - if that's what the contract stipulates - but long payment times do nothing to help the cash flow situation of SME suppliers.
But actual “late payments” - those that miss an agreed deadline - are probably particularly damaging because of their unpredictability. Small business owners would like to see remedies. FreeAgent’s survey found that around half of SMEs wanted a compensation system to be put in place and around the same percentage favored a system of penalties against late payers. In that respect, the government’s proposals are aligned with at least some of the demands of SMEs.
But in the shorter term, what can be done to ease the problem. Ed Molyneaux, CEO and founder of FreeAgent urges small business owners to be more upfront about enforcing the terms stated on their invoices. The starting point, he says, is to make it absolutely clear what those terms are. “You are likely to feel much more comfortable about chasing a client for late payments if you’ve already had a conversation about your terms for invoicing. Before you send your first invoice to a client, clearly explain what your terms are and if there are any penalties for unpaid invoices. This means that if they don’t pay on time, you’re simply reminding them of the terms,” he says.
It’s also important to ensure that the invoices don’t contain any mistakes that could be used to delay payments. “If your invoices are missing information, then you are giving your clients an opportunity to take advantage,” he adds.
These measures will make it easier to firmly - but politely - remind customers of their obligations.
Realistically, however, there is a power imbalance between small suppliers and the large customers they serve. Frankly, anyone thinking of complaining to a customer about a late payment may well decide that discretion is the greater part of valor. It's easier to let it go and accept that payment will arrive late rather than risk annoying a valuable customer. That may be a wrong conclusion, but it is understandable.
Doubtless, many SMEs can and do fight their space, but by introducing greater transparency, the government's action may help to change the late-payment culture. We live in hope. late
