SMEs need late payment action

A survey published in September 2015 found that British SMEs were owed £67.4 billion in unpaid invoices – up 36% from the 2011 total of £49.5 billion, and an increase of 8% over the last year alone. Half of the SMEs surveyed wrote off 10% of their turnover due to bad debts and almost a quarter wrote off between 10% and 25%. When invoices are paid, the average wait is 72 days, substantially longer than the 61 days recorded at the height of the recession. These figures only capture the experiences of 180,000 SMEs that report detailed accounts, so it is possible the actual situation may be even worse.

Industry focus: construction
The construction industry is particularly affected, accounting for £7 billion of total unpaid invoices – equating to 16% of the sector’s annual turnover. A construction business can expect to wait 107 days for payment, vastly longer than the average SME surveyed – and with serious repercussions. Subcontractors that receive payments late find it particularly difficult to manage their cash flow. This is directly affecting their ability to meet contractual obligations, because in some cases they are unable to continue funding the costs of materials and labour. The threat of insolvency can then easily arise. R3, the insolvency trade body, has said that late payment is now a major factor in one in five corporate insolvencies.

Impact on HMRC
Although a company may have an unpaid invoice, the VAT element still remains due to HMRC. So given the rise in late payments, it is no surprise that UK businesses owe nearly £2.6 billion in overdue VAT, up 2% from the £2.55 billion owed in 2014. The challenge facing SMEs has only increased since the rate of VAT rose to 20% in 2011, with increasing numbers struggling to meet VAT payment deadlines due to their hindered cash flow.

Old news
These are not recent revelations in the credit management industry. The Government-backed Prompt Payment Code was set up almost seven years ago, but progress has been slow. The Federation of Small Businesses has launched a fresh campaign to encourage the government to take further action, citing late payment as one of the top ten issues that small firms will face over the next five years. The situation isn’t helped by the recent increase in court fees, which could deter companies from pursuing recovery of unpaid invoices through legal action, forcing them instead to just write the balance off.

An alternative solution
It isn’t all doom and gloom though. Asset-based lenders are offering support to businesses with large and appropriate debtor ledgers. They currently provide SMEs with over £9 billion in finance secured against the value of outstanding invoices. They believe that companies should not have to plug the funding gap by stretching their credit facilities beyond a manageable point.

However, this kind of asset-based lending isn’t right for all businesses and SMEs should not feel forced to use it because of the late payment problem.

This issue of late payment deserves the urgent attention of policymakers in order that a structured plan may be introduced for combating it.