Cash & Liquidity ManagementPaymentsClearing & SettlementGrasping the late payments nettle

Grasping the late payments nettle

“Three out of four companies in Europe have experienced late payments in the last three years, with small and medium enterprises [SMEs] likely to be disproportionately affected by this phenomenon.”

The above quote is taken from the ‘Ex-Post Evaluation of Late Payment Directive (LPD)’ study, published last November, which is set to inform a report on the implementation of the European Union’s (EU) 2011 Directive 2011/7/EU (LPD) to be read before the European Parliament (EP) and the Council this month.

As many businesses will be aware, late payment is still a large-scale problem. Last July, Bacs Payments Schemes (Bacs) reported that UK SMEs collectively spent £10.8bn per year in attempts to recover overdue payments, up from the annual figure of £8.2bn in its July 2014 report.

A recent UK government report stated that, as of January 2015, £32.4bn was still owed to Britain’s 5.3m SMEs, demonstrating that there is still much to be done to remedy this issue.

Furthermore, results of the 2015 annual survey by the commercial debt collection agency Hilton Baird claimed that, as a direct consequence of late payment, one in ten UK businesses had to turn away new business. This supported the findings of credit management services group Intrum Justitia, which reported that 36% EU business believed their very survival was threatened by late payment.

So what lies ahead for businesses in terms of late payment regulation, and what can be done in the meantime to safeguard against the problem?

Calls for a culture shift

When the LPD was first introduced in 2011, it was accompanied by an awareness campaign which was intended to inform businesses in all EU member states about the new rules regarding late payment. The success of this campaign is disputed.

The Intrum Justitia report found that only 19% of those working in the public, education and healthcare sectors across the EU had heard of the LPD, with only 4% claiming they had seen a positive impact. Similarly, in the real estate sector, just under a quarter of businesses surveyed (24%) had heard of the directive and only 12% had seen a positive impact.

Furthermore, the Ex- Post Evaluation study claimed that, even if the campaign had raised awareness, it was not ignorance of the rules that was the problem. It’s an active dismissal of the rules as the result of a prevailing business culture which sees smaller suppliers suffer at the hand of power imbalances, where larger companies impose longer payment periods. As the study noted:

“…tolerating late payment against the promise of future business is often a rational choice… this combination of incentives makes it very hard for policymakers to tackle late payment.”

Nowhere is this more obvious than in the manufacturing sector. According to the Intrum Justitia report, 58% of manufacturing companies claimed their customers intentionally pay later than agreed, with 59% admitting that they have been asked to accept longer payment terms than they feel comfortable with.

The latest scandal involving UK group Tesco, uncovered by the Groceries Code Adjudicator – aka the Supermarket Ombudsman – saw this supermarket juggernaut intentionally delay payment to smaller suppliers in order to boost their bottom line and placate investors. This is a great example of the issue and, having been met with much criticism from the media, could it possibly signal a change in mind-set?

Recommendations from the Ex-Post Evaluation suggested that, if any awareness campaign was to be run in the future, it should be one aimed at making late payments a “socially unacceptable” practice in all EU member states.

In light of this, it seems that it may be down to small businesses themselves to ensure that they protect themselves against late payments, rather than relying on legislation to do the job for them.

Make payment easier

A report by Salima Paul and Rebecca Boden, entitled ‘Size Matters: the Late Payment Problem’, published in 2011, claimed that 80% of business-to-business (B2B) transactions are based on credit. It is the inability of small businesses to pay their suppliers, before being paid by the customer, which can cause the cash flow issues that result from late payment.

A possible reason for this could be the time it takes for cheques to be processed. As part of the UK’s Small Business, Enterprise and Employment Act, which was passed March 2015, it was agreed that electronic imaging of cheques can now replace cheques’ physical presentment.

When the policy was first suggested, a consultation was run concluding that “both large and small businesses benefit from paying in cheques remotely.” The consultation reported that cheques still accounted for a quarter of outgoing payments from small businesses, micro businesses, sole traders and charities, with 66% of the latter’s donation values coming from this channel of payment.

While faster clearing times will no doubt positively impact those who still use cheques, more can be done to reduce time taken for payment, even if it is just by a day or so.

Mike Hutchinson, director of scheme support and development for Bacs, wrote a press release entitled “Late payments costing SMEs billions”, in which he urged businesses to “look at automated payments like direct debit to reduce the time and money that companies are spending to recover payments due to them.”

Indeed, the benefits of paperless direct debits are numerous; they cut down administration and postage costs and reduce processing time and error rates, all resulting in faster payment times and fewer unpaid invoices.

SMEs need to protect themselves from the consequences of late payment, and one of the best ways to do this is through having full visibility and control over cash flow. Simplifying reconciliation will not only aid efficiency, but it will also boost business relationships as the room for error is minimised.

Looking to the future

In order for Europe’s economies to expand and recover fully, businesses need to continue growing. Capital investment and the ability to recruit more staff are key to achieving this.

In the most recent ‘Small Business Finance Markets’ report from the state-owned British Business Bank, it suggested that one of the main challenges still facing the UK economy was a lack of small business ‘up-scaling’. Organisation for Economic Co-operation and Development (OECD) data shows that many small businesses in the UK are still failing to grow by more than 10 employees after three years.

While the report found that 56% of the UK SMEs canvassed were intending to grow in 2016, it is this lack of recruitment ability that remains a sticking point.

Late payments pose a huge threat to job creation with 37% of business and professional services sector businesses participating in the Intrum Justitia report claiming that recruitment is “largely hindered” as a direct consequence. Worse than that, one in five are considering laying off staff due to cash flow issues. In the construction industry, 41% of respondents claimed they would definitely or probably hire more staff if their customers paid faster.

Despite low interest rates since the 2008 financial crisis, capital investment also remains limited with 77% of those in the leisure, hotel and restaurant sectors insisting that they had seen no impact at all on research and development (R&D) or operational asset investment as a result of the unusually low rates. In the telecommunications, media and IT sector, 73% claim that there has been no effect on their ability to finance growth.

It is clear that much more needs to be done moving forward to protect small businesses against this sorry state of affairs, but what can businesses themselves do in the meantime?

Be proactive: Switch to faster and more efficient payment methods, as outlined above, and ensure you have a robust credit management system in place. This should allow businesses to defend themselves against payment gaps.
Be more authoritative: Implement swift reminders and charge interest on late payments where possible. By acting immediately, and with confidence, businesses may start to see a shift in the prevailing business culture resulting in long-term benefits for the 99% of UK businesses that fuel the country’s economy.

Other articles by Louisa Buckingham

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