By Ed Molyneux, CEO and Co-Founder of FreeAgent

The small business sector has faced unprecedented challenges in 2020, not least from the Covid-19 pandemic and the global economic disruption it has created. But in addition to these new hazards, there continues to be a long-standing issue plaguing SMEs and putting them in jeopardy – the scourge of late payment.

Late and non-paying clients are one of the biggest threats to small businesses in the UK. It’s estimated that £23.4bn of late invoices are currently owed to small businesses across the UK and a stall in payments, no matter how small, can have a devastating impact.  While big companies might be able to take the hit from a late payer, smaller businesses are far less adaptable and need to maintain a steady and healthy cash flow to survive. And this struggle has been especially relevant during the Covid-19 pandemic, where day-to-day business has been slow, or in the worst cases, completely stagnant.

In this article, I will examine the ways in which overdue payments affect SMEs and why the situation is worsening – as well as highlighting the ways that the late payments issue can be addressed, by the businesses themselves and the government.

The worsening late payments issue and the impact on small businesses

There are a few reasons late payments have reached such a peak in their severity, but the coronavirus pandemic has certainly been a major factor in 2020. Disruptions to businesses across almost all sectors, and of all sizes, have forced a change in day-to-day work routines. With less profit being generated at a time when businesses must adapt to remain relevant to the market, payments to small businesses have moved down the hierarchy of importance. For many, sending payments on time is simply not a top priority right now.

Our own research into late payment has found that the number of invoices sent by UK SMEs and freelancers plummeted by 33% during lockdown (April-June 2020) – primarily as a result of a decline in ordinary day-to-day business. At the same time, the level of late payment has remained steady with around 46% of invoices paid late.

This highlights just how badly affected the small business sector has been by the pandemic and the need for late payments to be addressed as an equal priority to wider Covid-19 support.

Causes of late payments

As well as the immediate effects of Covid19, the other underlying reasons as to why the issue of late payments is getting worse stem heavily from two major failures: the failure of businesses to adopt technology that will simplify and streamline payments, meaning the process is efficient and admin-free; and the failure of the government to draw a stronger, harder line when it comes to ensuring payments are delivered on time.

Although cloud accounting systems and new frameworks such as open banking have created a range of straightforward, hassle-free ways for small businesses to stay on top of their financial admin, many business owners are yet to properly embrace this technology. Considering it’s never been easier, for example, to see an at-a-glance view of your outstanding invoices on your phone and set an automatic payment reminder email for late-payers, this is a huge missed opportunity.

However, even those who are using financial tech can still struggle to get the money they are owed, due to the lack of any kind of legal deterrent or consequences for larger businesses who routinely pay late.  By failing to monitor payment terms and enforce consequences for non-compliance, the government is just exacerbating the issue.

What can the government do to combat late payments?

We’ve found that the SME sector is becoming increasingly frustrated with the government’s response to the late payment problem. When we surveyed more than 1,200 UK small business owners, just 6% of respondents said that they thought elected officials were taking overdue payment for small businesses seriously – and nearly a quarter (22%) said they would like to see new legislation and harsher penalties introduced to specifically target late payers.

Among the suggestions that small businesses have floated to combat late payment include implementing an official UK ‘late payment’ code of conduct for businesses to sign up to or establishing a star rating system for larger companies based on whether they pay on time. Some even believe that late payment should be considered as a corporate crime that should be punished through heavy fines or prison sentences.

While the government seems unlikely to go that far, it has recently announced that large UK companies could face fines or penalties if they don’t pay smaller suppliers on time under new rules being considered. This certainly seems to be a positive development, but it will need to actually follow through with these revisions to ensure small businesses are protected.

The urgency for action cannot be understated. Small business owners don’t have the luxury of being able to absorb overdue payments into their accounts: they need to get paid promptly to keep their cash flow healthy and keep their businesses viable.

With Covid threatening the next six months (at least) of economic recovery, it is vital that small businesses are provided with the support they need to stay afloat – and a good way to help is by enforcing measures that will rule out late payments, not only at a time of crisis, but once and for all.