The Scourge of Late Payments: The £13bn Problem Undermining UK SMEs

It is estimated that 50,000 businesses become insolvent each year, partly as a result of not being paid on time. With new regulations cracking down on the practice, could automating invoice processing help companies to stay on top?

Imagine filling a supermarket trolley up, wheeling it past the checkout and saying: “I’ll pay you in a couple of months.” You’d likely be arrested. But those are the sort of terms many supermarkets hand their suppliers when it comes to payment.

This is one reason why Nicola Simmons, owner of premium preserve brand Single Variety Co, tries to steer clear of doing business with big chains. As it is, growing the business is a challenge, because of constant issues with late payments. Multiple customers are behind, one by six months. “I don’t know if I’ll get the money,” she says. “I’ve tried emailing, calling and texting. It’s not pleasant week after week. Having said that, I’ve got better at doing it. When I started off I was almost apologetic when I had to chase people.”

The situation has been so bad at times that Simmons, who founded the business three years ago and now employs two staff, has had to put off paying herself.

“It’s upsetting but the knock-on effects are frustrating, too, because I consciously restrict the amount of stock I produce, which makes it hard to grow the business. I have to plan for not getting paid. I now ask new customers to pay up front.”

It isn’t just supermarkets that are slow payers. Bad debt is a chronic problem afflicting 5.6m small and medium-sized businesses across the UK. Payment processor Bacs recently revealed that nearly half of SMEs experience late payments, with £13bn owed to them in total. The Federation of Small Business estimates that late payments contribute to 50,000 insolvencies annually, costing the economy £2.5bn.

In this year’s spring statement, Philip Hammond, the chancellor, announced a crackdown on the practice, requiring big companies to appoint a non-executive director responsible for reducing late payments to smaller suppliers. They must also publish payment practices in their annual reports – with the threat that late payers will not receive government contracts.

It’s just the latest attempt to correct their financial misbehaviour. In April 2017, the introduction of Duty to Report required large UK companies to publish their payment policies, practices and performance twice-yearly. Eight months after Duty to Report came into being, the Office of the Small Business Commissioner (SBC) was established to ensure fair payment practices and assist small businesses in disputes.

The small business commissioner, Paul Uppal, has direct experience of the issue, having run a firm in the construction industry, another sector with a poor payment record.

“When I was in the trade, late payment was the number one concern I had,” he recalls, “I had good relationships so I’d go round to see people, but not everyone can do that. I still needed an overdraft and there were times when we were pushed to the edge of our overdraft and I’d have a pretty fitful weekend worrying when the money was coming in.

“Many sole traders just give up,” he adds. “I recall one electrician telling me: ‘It was either lose my home or my family or go to work for someone else.’ He wasn’t the only tradesman I knew in that position.”

The SBC has mediated thousands of cases since it was established, and has helped resolve payment disputes worth £400,000 with larger businesses. It also enforces late payment interest penalties. These can be claimed as a legal right, but small companies are often reticent to challenge larger ones and see their relationship closed off.

One company that did go down that route was Magellan Design, a design agency whose founder and managing director, Andrew Osman, pursued cereal manufacturer Jordans & Ryvita following late payment for a project. Osman was passed round various departments for months before his bill was settled, meaning he had to pay suppliers out of his own pocket.

“I got the money eventually and I could have left it there, but I was so annoyed I decided to do something about it,” he says. “I went to the Small Business Commissioner, which investigated and helped me win compensation. It wouldn’t have happened otherwise.”

Jordans & Ryvita, which manages more than 22,000 payments each year, said the invoice wasn’t processed correctly as a result of human error and that, as a result of the incident, it had re-trained staff on the correct procedures for raising and processing invoices.

The SBC’s research reveals that poor administration is often a major reason for late payments.

Even companies with proper procedures in place can sometimes have trouble adhering to them, with cumbersome processes inviting human errors. Some organisations’ convoluted billing procedures can be laborious to negotiate, too.

Typically, a long chain is involved – accounts payable departments have to match supplier invoices against purchase orders and receipts, record it in the accounting system, and code it. Then the payment needs to be approved. Matthew Walker, business development manager at the Forum of Private Business, believes a “culture shift” is needed with the adoption of automated practices.

“We need to take away the excuses, because more often than not big businesses pay up when they’re forced to,” he says. “So why can’t they do it at the time? Technology offers the way forward and it needs to start at the top of the chain. I’ve personally used automated invoicing software. It eliminates human error and automatically creates an audit trail that’s legally binding. There’s no comeback.”

Automated invoicing software can also speed up processing time by reducing duplication, enabling reviewers to approve invoices remotely, and by quickly detecting potentially fraudulent invoices.

In addition, automated solutions – such as Concur Invoice – can help alleviate the extra administrative burden involved in reporting payment performance under the new Duty to Report rules. They can also help companies make more accurate cashflow forecasts – with some systems integrating near real-time data to help provide reports and alerts to help companies keep a check on spending.

Given that big business is rarely slow to turn to automation in other areas, such as production lines and self-service checkouts, there’s no reason not to employ it when it comes to paying up.

Concur Invoice, an online invoice solution, captures paper and e-invoices, so you can capture all your accounts payable spending and simplify the entire process – from purchase requests to processing and payment. For more information, go to concur.co.uk/invoice