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Late Payments to Small Firms are a Drag on the UK Economy

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Surveys of the challenges facing small firms regularly show that one of the biggest problems they face is that of late payment with thirty-day invoices taking at least 42 days to be paid on average with the UK’s largest businesses being the worst offenders

For example, a recent study by the Federation of Small Businesses suggested that late payment leads to over 50,000 business failures every year (or around 23 per cent of all business insolvencies).

It is also estimated to cost the UK economy over £2.4 billion annually with cashflow difficulties arising from late payments resulting in an increasing number of SMEs being unable to plan for the future, invest in their business, add value to their customers and pay better salaries to their employees.

Whilst there is some legislation to deal with late payment, many owner-managers say that it does not go far enough and has done little to change the behaviour of late paying organisations.

According to the Institute of Directors, nearly half of firms have not only had recent issues with late payments, but that larger firms are continually getting away with imposing unfair terms and conditions on invoicing that merely makes the situation worse.

A number of bodies have identified this as a key issue and have come up with potential solutions to this perennial problem.

Only last month, the Association of Accounting Technicians (whose 4,250 licensed members provide tax and accountancy services to more than 400,000 SMEs) recommended that a Prompt Payment Code should be made compulsory for companies with more than 250 staff and that payment terms should be halved from a maximum of 60 days to a maximum of 30 days.

In addition, a clear, simple financial penalty regime for persistent late payers should be introduced and enforced by the Small Business Commissioner who has recently been appointed by the UK Government to deal with those who do not keep to the terms and conditions they have agreed with smaller firms.

The question is whether this will make a difference to those consistent offenders who have ignored the current legislation and any efforts by policymakers to encourage them to change their approach?

Many do not think it will and it may take the UK Government and other public bodies to show the way in this respect.

With UK public sector procurement estimated to be worth £223 billion, the quicker that can be paid to smaller suppliers by the public sector, the bigger impact it will have on the UK economy.

Certainly, it is good news that the UK government has recently set the ambition that all its departments commit to paying 90 per cent of undisputed invoices from SMEs within five days. It could also make it a contractual obligation for any large supplier in receipt of public sector contracts to do the same.

If that can be done then as the UK prepares to leave the European Union, then it will be a critical first step in ensuring that small firms – the engine of our economy – can maximise their contribution to the prosperity of this country over the next few years rather than having to deal with late payments that restrict their competitiveness and productivity.