By Rebecca Danks, product manager, Yapily

Napoleon once called Britain a nation of shopkeepers, but with Small and Medium Enterprises (SMEs) making up 99.9% of the UK economy, today we’re more of a nation of SMEs. Yet at a critical moment in our recovery post-pandemic, SMEs up and down the country are not getting paid on time, and this is proving detrimental.

Recent research found 83% of businesses with 10-49 employees are paid late most of the time, while 68% of all UK businesses are regularly paid late. This is causing a staggering 50,000 SMEs to collapse every year.

Most worrying is the impact late payments have on a SME’s attitude to risk and growth. Unable to plan resources due to constant uncertainty over cash flow, it hampers productivity and restricts investment. This is having a damaging impact on both business leaders and working people across the UK, with many forced to turn to government rescue schemes. It’s clear something needs to change.

What’s causing the late-payments crisis?

Undoubtedly, the pandemic worsened economic inequality in the UK. While the vaccine rollout has been successful and restrictions have mostly lifted, the virus’s economic impact lingers. The main challenge for people and businesses across the country is the cash flow needed to fully pay off debts and invoices each month.

We need to make it easier for businesses to access credit options. With easier access to credit, SMEs would be better insulated from the impact of late payments, and in a stronger position to manage and grow their business more effectively.

While issues with cash flow do play a large part in the late-payments crisis, it doesn’t explain the issue in its entirety. When looking to address it, we must go to the crux of the problem itself – payments. Direct Debits, commonly used by SMEs, don’t work well for suppliers paying invoices as they don’t allow the value of the payment to be changed each month. This is crucial, as often supplier invoices vary from month to month depending on how often a service is used or the amount of product bought. Direct debit structures are struggling to meet the demands of the modern SME today.

Mitigating the late-payments crisis

Variable Recurring Payments (VRPs) enabled by open banking can help mitigate the late-payments crisis for SMEs.

VRPs for sweeping permits the automatic transfer of money between a consumer’s own accounts for saving or repaying a loan. Through open-banking enabled VRPs, consumers will have the ability to securely instruct and manage payments to their own accounts – once the CMA9 implement it into their offerings

The potential here is huge and VRPs shouldn’t end with sweeping. VRP use cases should be extended, to include Bulk Payments, Subscription Based Payments, and Refunds. All of which can play their part in helping businesses get paid on time. Open banking infrastructure can and should be used by businesses to identify key suppliers and set up VRPs to pay their invoices instantly, and, vitally, on time. When fully mandated, it will act as a smarter, more flexible version of Direct Debits.

To maximise VRP’s potential, it should be extended to use cases where both accounts aren’t owned by the same person. If we are to solve the late payment crisis, this must become the next step of the UK’s open banking journey.

For businesses’ sake

We are a nation of SMEs and our economy relies on them to provide jobs and stimulate growth. As such, we must be on the side of SMEs. Rebuilding effectively after the events of the last two years depends on the prosperity of these organisations. But they won’t be prosperous if they are not being paid on time by customers or suppliers.

Easier access to credit options, and harnessing open banking enabled VRPs, will enable SMEs to tackle the late-payments issue plaguing our economy. Open banking enabled VRPs are on the side of British businesses.