The Real Cost of Late Payments for SME’s in the UK

Understanding the Impact of Late Payments on UK SMEs

By Gordon Merrylees, Chief Commercial Officer, Know-it

Late payments can be debilitating to any small-medium sized enterprise (SME). Over 50,000 cease trading every year due to this issue, resulting in untold damage to the entire UK financial state. SMEs are currently owed £61bn in late payments, a 20 per cent increase compared to this time last year.

As the essence of the UK’s economy – c.6m UK SME’s turnover an estimated at £2.2 trillion annually, tackling the issue of late payments will be vital in enabling small businesses to reach their full productive potential and improve not only the growth of their enterprise but the growth of the UK economy.

The full impact of late payments

The European Commission found that in the UK, 30% of businesses indicated that late payment had links to subsequent redundancies, compared to 35% of businesses in Germany; 28% in Spain and 25% in France. Based on the UK’s average salary of £29,600, that unpaid money could pay for businesses to hire more than two million people.

Late payments force many affected businesses to focus on day-to-day activities rather than longer-term plans for growth and expansion. As a result, the longer companies wait for payment, the lower the level of investment they make.

A survey from cashflow management system Penny Freedom has revealed that two thirds of the six million SMEs in the UK have at least one late payment on their books, with an average value of £15,370.

A month delay in being paid would reduce capital spend by 1.2%, and could lead to reduced profitability for as long as five years thereafter. There is clear evidence that late payment is linked to an inability to access affordable finance, due for example to an inability to demonstrate to lenders a clear cash flow.

A recent exclusive survey with YouGov to better understand the situation among business-to-business SMEs across the UK, surveying a sample of 500 businesses with up to 49 employees, 68% confirmed they regularly experience late payments. And 62% spend time each week chasing overdue invoices. That equates to four million businesses (and 1.7 million VAT registered businesses) struggling to get paid for products and services they’ve delivered. The time, energy and resources drain that this causes is significant, and the effort could be spent instead growing the business. And there’s no doubt that the pandemic has made this dire situation worse, with increased levels of debt, reduced cashflows and some larger organisations looking to retain cash themselves – even freezing payments for some small suppliers.

It is evident that SME’s must invest in more efficient invoicing processes, such as cloud accounting and automated invoice chasing. Consistent late payers must also appreciate the risk to their operations. Should their suppliers halt trading, as a result, this can present severe challenges in sourcing products and services for their own business, impeding their performance. Ultimately, it is critical to acknowledge that while larger enterprises have the resources to absorb debt, SMEs don’t, and they become the hardest hit as a result.

We are witnessing an increasing inability for SME’s to pay overheads on time, difficulties paying staff salaries and most worryingly, a heavy reliance on invoice financing to inject capital into their businesses. A major concern for small business owners moving forward is that access to finance may become more problematic as we are faced with the financial impacts of the global pandemic.

The past 18 months have been extremely testing for business owners, with more than a third reporting an increase in the time customers take to pay invoices. The impact on those rejected financial loans may have major consequences on continuity as we move forward. The inability to make new hires, expand premises or invest in new technology to streamline processes makes the future for SMEs very challenging.

The data highlights an increasing struggle when it comes to late payments. Despite the government outlining a route post lockdown, many organisations on the receiving end of late payments will struggle to survive after the crisis.

As many as 15% of the UK’s SMEs are rated ‘fragile’ and risk insolvency during the next four years as Covid-19 state support schemes are withdrawn, according to research by Euler Hermes.

For now, businesses will need to combat the economic gales that are likely to slow the global recovery whilst simultaneously planning effectively for long-term growth. Supply chain disruption leaves many open to supply shortages and inflation which will limit growth.

Moving forward  

The impact and damage of the issue of late payments goes way beyond the invoice in question. And frankly way beyond the SME in question. And it cannot be overstated how late payments damage the entire business ecosystem.

2022 is going to be a key year to recover and build back stronger, so tackling the endemic issue of late payments should be a business priority. Legislation alone cannot fix it. Businesses must do their bit and technology must be available to make payment as simple as possible. If businesses work together to embrace digital solutions to pay suppliers faster, win back crucial time for SME’s and get the cash they’re owed, it will help tremendously towards the overall recovery and create a more robust and sustainable trading environment for businesses of all sizes, helping them survive and thrive.