Unpaid invoices and the costs associated with companies pursuing customers’ payments, as well as long payment terms, mean that SMEs in the UK are missing out on over £250 billion of liquid cash flow every year. Integral to the UK economy, SMEs account for 47% of all private sector turnover. Delayed payments from customers can threaten SMEs’ ability to trade, stifle appetite for growth and recruitment and, in the worst cases, lead to insolvencies. As a consequence, leaving SMEs to cope with the problem is harming the economy as a whole.
Compared to larger companies, SMEs tend to suffer from slow and/or late payments disproportionately due to their position, typically towards the end of the supply chain. Businesses with an annual turnover of under £1 million wait on average 72 days for invoices to be paid.Businesses with an annual turnover of between £1 million and £10 million wait on average 53-54 days. This is significantly longer than the largest businesses, which typically wait 48 days.
One of the reasons behind the slow payment problem is the increasingly commonly demanded 90-day payment terms from large companies, as well as the persistent and growing trend for late payments generally. In 2013, a well-known pharmaceuticals company came under fire for introducing a new 90-day timescale for its suppliers, joining other companies such as iconic supermarkets, drinks companies and IT giants. The Forum of Private Business said this move demonstrated “scant regard” for small suppliers, and in its latest international survey of B2B Payment behaviour, Atradius found that around 90% of British respondents had received payments from customers late.
It is clear that late payments are an acute cause of concern for SMEs. In a survey of 1000 SMEs, 23% reported that late payments had put them at risk of closure. For a significant proportion, the risk of closure becomes reality; insolvency trade body R3 has said that late payment is a major factor in one in five corporate insolvencies. Quite apart from these visible consequences, many sources allude to the impact of late payments on SMEs’ appetite for investment and willingness to hire.
Although companies view outstanding bills as a drain on their cash flow, solutions such as invoice finance can provide a solution, so that invoices can be in effect leveraged to unlock funding. By using invoice finance, when a company invoices their customer, up to 90% of the approved invoice total is straightaway advanced by the finance provider, with the remaining 10% paid once their customer settles the balance. Whilst companies are still required to ensure the eventual payment of their customers’ invoices, invoice finance provides essential working capital so the business can then invest in expanding its operations without having to wait for, or chase, payment of outstanding bills.
Invoice finance companies now provide more funding than ever before to SMEs, with funds used across the UK for the first time recently exceeding £20billion. With access to working capital SMEs can look to invest in areas that have been viewed as optional extras or aspirational. For example, promotion, advertising and entertainment only account for approximately 1% of an SME’s spend; employee benefits 2.4%, and business equipment 3%. Clearly, small businesses are prioritising paying for rent (4.6%) and employee wages (19.4%). Nevertheless, with more cash at their disposal, taking on extra staff, more adventurous marketing, expansion into new product or service lines, or new territories could all be options for businesses to consider.