News

The end of late payments? Saving the small business

29th June 2018

Earlier this month, a letter from FSB National Chairman, Mike Cherry, urged Chairmans and CEOs of all FTSE 100 organisations to lead by example and act on late payments in a bid to end the poor practice for good. The call is welcomed by small businesses within industries across the UK, who have been subject to the poor payment culture for years.

Unequal balance in business relationships

Large organisations, of which we have seen many examples in recent years, have long been able to leverage their bargaining power over smaller suppliers, for whom the risk of cutting ties is often too financially unstable as so much of their business relies on these buyers. Despite legislation stating the period for b2b payments should never exceed 60 working days, unless agreed otherwise by both parties, millions of small businesses continue to be affected, creating a somewhat fragmented relationship between business and supplier.

What is the impact of a late payment on small businesses?

The FSB estimate that around one in three payments to small businesses are late, with almost two thirds of those coming from large organisations, leading to many hours wasted chasing invoices. The effects of late payments, inevitably, lead to mostly financial strains, with many small organisations running into cash flow difficulties, as many as 30% having to use an overdraft, and some collapsing altogether.

The recruitment sector is particularly affected by the issue of long payment cycles, often due to the scale of the clients worked with, but also where recruitment patterns can be difficult to determine. This creates a challenge in terms of guaranteeing a steady flow of income, with many recruitment firms needing to adopt sturdier processes in terms of credit checking potential clients.

Another, less-considered, consequence of late-payments is the level of stress this can cause small business owners, as the knock-on effects have a detrimental impact on the whole supply chain, as well as personal life dependencies such as rent or mortgage payments.

How can the late payment culture change?

It could be argued that responsibility must be shared with the smaller business to impose penalties of late-payments by charging interest. But, as a tremendous 79% of small businesses don’t currently enforce this practice, this furthers the argument that supplier bargaining power is, in many cases, too low to manage the risk of buyers switching suppliers altogether.

Quite simply, large organisations must be accountable for their actions and work more transparently to harness good relationships with suppliers. It is the responsibility of senior decision makers within those businesses to ensure legislation is followed and reflect good practice, so that a new payment culture can emerge that promotes all-round better business practices.

Following on from the Business, Energy and Industrial Strategy (BEIS) Committee enquiry into the government earlier in the year, on whether enough is being done to help small suppliers facing late payments, it remains to be seen as to whether the appointed Small Business Commissioner will strengthen transactions between small businesses and their larger buyers.

As recruitment experts across all areas of finance, at Grafton Banks Finance we endeavour to stay on top of current business and finance news so that we can advise clients and candidates based on our knowledge and experience. If you would like to speak with us about how we can help you, contact Nigel Jeyes on 01273 229499 or by emailing nigel@graftonbanks.co.uk.