The benefits of promoting the ‘trickle up theory’

Liz Barclay, the UK’s Small Business Commissioner, makes an extremely strong argument in favour of SMEs being paid quicker for their services. And she wishes to know your thoughts on this subject

The benefits of promoting the ‘trickle up theory’

I certainly don’t profess to know all the answers when it comes to finance, but there is a train of thought that the economy would benefit greatly if businesses were paid sooner for completed work. If small businesses of all sizes, from freelancers and sole traders, up to those with 50 employees, were paid quicker, what difference would that make to the UK economy? 

Interestingly that research is missing. It’s called the ‘Velocity of Cash’ argument: By transferring these payments, which are owed to small firms sooner, these companies would then spend it by investing in improvements that will boost productivity and growth. I describe this as the ‘trickle up effect’.

On average, small firms are currently paid after 32 days, and many will be happy with that. However, averages cover a multitude of sins and many lucky suppliers will be paid sooner, meaning many will have to wait even longer to be remunerated for completed work. 

Believe it or not we do have signatories to the Prompt Payment Code that endeavours to pay companies within seven days of work being completed satisfactorily. Some even claim to pay on the same day. But systems rarely manage that, so even when the payment reaches the supplier on the next day, those payments are counted as late. 

On the other side of the coin, many suppliers are paid much later than the average. As Small Business Commissioner for the UK, I read plenty of complaints from firms regarding late payments. Complainants report to us that payment terms of 60/90/120 days are even being ignored. On average, even these are eight days late.

It’s the uncertainty that stops smaller firms from investing in equipment, training and recruitment. This uncertainty also causes sleepless nights, arguments, relationship breakdowns, and even mental health problems. If you were paid a week quicker than you are now, would that give you the confidence to spend your money differently?

If the velocity with which cash reached small firms could be speeded-up, what benefits would that achieve? There are 5.6m small and micro firms in the UK. And if these were paid quicker, it is highly likely that they would spend their money in a manner that would boost productivity, growth and innovation. 

There are all sorts of reasons why bigger customers hold on to their cash. One cynical, but certainly true, reason is that they wish to make the books look better when reporting their finances. 

This, in turn, will allow them to offer better dividends to shareholders because they need to attract investment – or use this ‘borrowed’ money to invest in their own business growth and development. When times are uncertain, bigger firms tend not to spend. They merely sit on piles of cash which is not available to boost the economy. 

If SMEs received their money sooner, they would spend it on equipment upgrades, upskilling and job creation. And they have told us this. However, without the cash they are due, they have no choice but to hold back on these plans. They could also use the money to speed-up their digital transformation, as well as the drive to reach Net Zero. 

Once small businesses start spending, this has a positive knock-on effect. They use this money to gain orders, and the process spills over into communities, boosting donations to charities and facilities for young people. The ‘social value’ is hard to measure but is immense. If ‘good business’ pays quicker; then its positive news for businesses all along the supply chain.

We’re running a campaign this autumn to illustrate the benefits of paying small businesses sooner. It would be positive for the whole economy, along with local communities and wider society. And we’d like your help in compiling evidence.

Of course, my argument gets pushed back on. People say that this is only shifting existing money around and will make no real difference. They claim this money is neither created nor destroyed – and that’s true.

But if payments are made sooner along the entire supply line, this cash will be used by small business owners to boost investment and ultimately productivity, rather than being locked up in coffers.

People argue that this would simply be a one-off boost but I think that it would create a contagion effect where people grow their businesses. SMEs would not need to waste time chasing up payments. They would have more time to plan and improve processes, so the efficiency factor kicks in too. Everyone benefits along the way and you can’t put a price on helping charities, communities, mental health and wellbeing.

If I’ve convinced you of my argument, please let me know your thoughts. And even if I have failed to convince you, then also please tell me and explain why. Either way, let us get this debate moving. For me, it’s so important that the push to quicken payments to smaller firms is moved swiftly up the agenda.

Liz Barclay
Liz Barclay

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