SMEs need more than government help to bring an end to late payments

Although the government’s upping its game against crippling late payments, companies must implement their own measures to get rid of the scourge

SMEs need more than government help to bring an end to late payments

If trade credit oils the wheels of trade then late payment is rust in the machine, causing severe liquidity constraints, hindering business growth and easily leading to insolvency. It’s a serious concern in the UK and overseas but while we would all like to see action, many of us feel powerless in the face of such a deep-seated problem.

However, there are positive signs the government is ready to take a more proactive approach, perhaps spurred by research from the Federation of Small Businesses suggesting tackling late payment could add £2.5bn to the economy. The government may also have been embarrassed by Carillion’s collapse in 2018, for while the construction giant was notorious for poor payment practices it was also a long-term signatory of the voluntary Prompt Payment Code, the payment practice standards. 

Since then the government’s announced a series of measures, including calls to evidence tackling late payments and bolstering the role of the Prompt Payment Code’s Compliance Board, which oversees complaints about its members. More recently, chancellor Philip Hammond announced large businesses will be required to appoint a non-executive director, responsible for reviewing payment practices and reporting progress in annual accounts. 

Of course, there is some way to go. The Small Business Commissioner, set up by government to tackle private sector late payment, recovered unpaid invoices worth £2.1m in its first year of operation. To put this into perspective, research by Bacs Payment Schemes revealed UK SMEs faced total late payments bill worth £13bn last year. This takes into account the amount owed was an average £17,000 per company, with average recovery costs of £9,000.

However, it’s important to recognise late payment isn’t solely a case of corporate giants using their might to exploit SMEs. While SMEs are certainly more vulnerable, the problem affects every business supplying goods and services on credit. And as with insolvency, late payment by one customer can trigger a domino effect along the entire supply chain. 

Although the government’s measures are significant, we all have shared responsibility to challenge behaviour that undermines trading, hinders growth and is so obviously detrimental to the economy. Of course, that means instilling ethical payment behaviour towards suppliers through corporate policies and procedures. But at the same time, every company needs guarantees they aren’t unwittingly enabling late payment by failing to follow good credit management practices.

But what does good practice look like exactly? It begins by running checks on customer payment behaviour before offering or extending credit terms. Coface, the credit insurer, for example maintains a database of 80 million companies, with information on any of them as part of the service.

Businesses should also set payment terms and an enforceable retention of title (RoT) clause in sales contracts to retain ownership of supplied goods until they’ve been paid for. It’s advised to seek legal advice on wording RoT clauses and ensuring goods can be identified if necessary. 

Good practice also means undertaking regular financial health checks on customers to ensure the information you’ve got is up to date. For instance, as a credit insurer Coface maintains up-to-the-minute customer data for clients to accurately assess risks. Moreover, Coface pings alerts should a customer’s financial situations change, letting clients react and amend their payment terms quickly.

In addition to this, use experienced professionals to chase outstanding amounts and flag potential disputes early to maximise the chances of resolution. Rather than putting pressure on your existing credit management function to do this, consider outsourcing. Take Coface for example, which has the name and financial leverage to recover late payments, with over €1.6bn entrusted to its global network of collections teams.  

For too long late payment has been branded an inevitable fact of business life to contend with. But if something positive has come from the Carillion affair it’s that the issue has been thrust into the spotlight. While the government has the power to enact tougher regulations, good credit management practices combined with a partnership with companies such as Coface will relieve pressure and protect that all-important cash flow. 

This article comes courtesy of Coface, the world-leading credit insurance specialist

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