One in Six Invoices are Late Paying – hitting UK Businesses hard
New research by R3, the insolvency trade body, has found that almost one-in-six (15 percent) of all invoices sent out by UK businesses has been paid late in the last six months. This is the cause of much concern, particularly for smaller business, given that late payment is a primary or major factor in one-in-five company insolvencies.
The research also found that just under half of the businesses questioned (49 percent) had been made to wait for payment beyond the prescribed deadline. The statistics show that although the government has introduced a number of measures to bring the number of late payments down, to date they have experienced only very limited success. In fact, in 2014 and 2015, the proportion of late payments remained stubbornly high. It is estimated that around 12% of companies with late payment issues eventually result in administration and or insolvent liquidation.
The problems caused by late payments
Late payments put unnecessary strain on a business’ cashflow. Cashflow is crucial to a business’ survival, particularly for smaller businesses which do not have the luxury of retained profits or substantial pools of cash reserves to rely on. Having plenty of cash in hand allows businesses to pay employees and creditors on time, and take advantage of opportunities that comes their way.
If a business does not have enough cash to support its operations and repay its debts, it is said to be insolvent. The result of which, without help, can be the company’s subsequent liquidation. The trouble is that despite government guidelines and business campaigns, late payment still remains all too common. And, as businesses know how much it can cost to chase debts, they still feel they can get away with it.
Sole traders and smaller firms bear the brunt
A late paying invoices culture is typically perpetuated by larger companies towards their smaller suppliers. Just one or two regular contracts with larger companies can be the core of a small operator’s business, which is why smaller firms are often reluctant to rock the boat. The larger companies use this to their advantage, often demanding generous payment terms in the first instance, only to fail to stick to them.
If a company enters insolvency, debtors see this as an opportunity to further delay payments, or avoid making the payment at all. Under normal circumstances, a company could be allowed to trade in administration until a buyer is found, or a company rescue could help the business make a complete recovery; however, continued doubts over cashhfflow caused by late payments can make either of these resolutions impossible.
Commenting on the findings, the National Chairman of the Federation of Small Businesses (FSB), John Allan, said: “The weight of evidence showing the damage poor payment practices are having on the UK economy grows greater each day, with the amount owed in late payments now at £41.5billion.
“Addressing the UK’s poor payment culture – particularly among large companies towards their smaller suppliers – must be a top priority for the new government. Small businesses see progress on payment practices as a key benchmark of success for the new administration.”
The proportion of UK businesses reporting late payments
The discrepancy between the impact of late payments on small and larger business is clear. Sole traders are the most likely victims of late payments, with an average of 17.3 percent of all invoices paid late in the last six months. In contrast, just 12.3 percent of the invoices issued by large businesses (those with more than 250 employees) were paid late.
In fact, 7 percent of sole traders had to deal with 41-50 percent of all the invoices they issued in 2014-2015 being paid late. The corresponding proportion of larger businesses was just 1 percent. For smaller companies, the consequences of such a widespread late payment culture can be disastrous. In many cases, just one late invoice can have a significant impact on a very small company.
You can help dilute the risk to your business by not working with major client no matter how good the relationship or apparent stability, or size of the company. If your company is struggling financially due to slow paying invoices and you are juggling bills then we may be able to help.
Call 08000746 757 to speak to someone that can advise on the best solution for you.
Written by: Mike Smith