Picture this – something that contributes millions to the economy and accounts for more than half of UK employment is being constrained by a major obstacle that is entirely avoidable. You’d make it a priority to fix it, right? The issue of small businesses being paid late fits this description perfectly, yet late payments are still more apparent than ever.
At Xero, we refer to late payments as ‘unapproved debt,’ because that’s precisely what withholding capital that is owed to a supplier is. And as many heard during my recent panel discussion at Elite Business Live, this unnecessary burden is adding fuel to the fire and exacerbating the issue of broader economic uncertainty. Business owners are contending with sky high energy costs, stagnant consumer spending and higher costs for goods thanks to inflation. But unlike those factors, late payments are completely within control. And it’s only getting worse.
According to Xero’s latest Small Business Index (XSBI) small firms were paid, on average, 6.4 days later than the agreed payment terms during January and February this year. But this problem only gets more concerning when equated to the cost of the time it takes to chase late invoices. Our analysis estimates that late payments cost small businesses £1.6 billion in 2023, an increase from £684m in 2021.
At its core, the impact is an economic one. But it’s also a social issue. For instance, late payments create cash flow challenges that influence whether business owners can pay their staff on time, buy goods and materials or manage rising bills – all stressful issues that can affect their mental health. For many small firms and sole traders, professional finances overlap with personal finances, which makes the implications even more stark. Small businesses also sit at the heart of communities across the country, providing jobs and support networks for the populations that rely on them.
We’ve seen some steps taken recently by the UK Government to address the issue, but we all need to pull together to do more.
Paying invoices is more than just admin
Healthy cash flow isn’t just a nice-to-have. It’s fundamental to business survival and sometimes the difference between breaking even and falling into administration. For larger firms using small business suppliers, late payments are too easily hidden or overlooked in financial reporting, which leads to a lack of transparency and accountability. Business leaders should be made to confront the reality of their company’s payment practices, made aware of the consequences and mandated to address any inefficiencies or delays.
There are a few ways we would recommend tackling this. For example, ensuring late payment information is included in company performance metrics and reports will help identify the worst offenders and apply a form of pressure to encourage them to change their behaviour. The Government can also do more to ensure that big businesses who do not report on their legal obligations to publish their payments times are held to account, as well as improve education to inform best practice. Above all, renaming late payments what they are – unapproved debt – can help emphasise that these poor practices are unacceptable.
Using digital tools to stay on top of payments
While companies using small businesses as suppliers have a significant responsibility to pay them on time, there are also steps that small businesses can take to alleviate the pressure.
More small businesses could be leveraging digital tools to help them get paid on time. Xero’s research shows only 24% of small businesses use accounting software to track payments, and 28% of small businesses are using automated payment schedules and reminders.
Giving customers more flexibility in how they pay, such as by card or direct debit, can also help small businesses get paid on time. Adding a ‘pay now’ button to online invoices reduces the administrative burden for small business owners and means they spend less time chasing payments.
As well as being able to monitor payments going in and out, understanding the incidence of late payments can help identify the worst payers. This can help small businesses to make informed decisions about who they want to trade with. It might feel counterintuitive to be picky in the current economic climate – surely any business is good business, right? But given the knock-on impact of late payments, small businesses should evaluate the credit scores of new and existing customers to avoid being stung.
Finally, small businesses can better protect themselves by clearly communicating and agreeing on invoice payment terms before work is started.
Put late payments to bed
Small businesses can apply various tactics to mitigate the impact of cash flow issues like late payments. We all know the corporate world isn’t perfect, and unfortunately, most small businesses will come to accept they’ll be working with late payers on occasion. But the resources of the UK’s small business community are not infinite. We need to see real change come from tangible conversations around payments policy, in particular holding larger companies to account for poor practices and encouraging transparency on the issue.
Watch Alex Von Schirmeister’s latest Keynote Session at Elite Business Live on Demand here!
