Late payment crisis will not be solved by new payment practice laws, say four in five SMEs, and could deepen thanks to unintended consequences

This article is brought to you by Retail Technology Review: Late payment crisis will not be solved by new payment practice laws, say four in five SMEs, and could deepen thanks to unintended consequences.

The vast majority (74%) of SME do not think new guidelines, forcing large businesses to detail how they pay smaller suppliers, will have an impact on late payments, according to new findings from Crossflow Payments, the supply chain finance platform.

Just 17% of the decision makers from the 5.4m British SMEs think the recent introduction of the 'Duty to Report' measures, forcing large businesses to report publically on how they pay small businesses, including the average time they take to pay suppliers, will have a positive impact upon their business.¹

The harsh assessment comes as SMEs face an endemic working capital crunch, with an estimated £266bn of turnover locked up in late payments,³ as almost a quarter (23%) admit they usually receive payment for invoices late. One in ten (10%) SMEs say they have experienced an increase in late payments by their customers since the EU Referendum in June 2016.

Tony Duggan, Crossflow Payments CEO, commented on the research: "The vast majority of SMEs we polled think the new payment reporting rules will do nothing to fix the late payment crisis. They are right. In fact, the new rules could make a bad situation worse. An unintended consequence of the rules is that large corporates are likely to respond by negotiating longer payment terms with suppliers to shift the goalposts and create the illusion that they are paying on time. Add to the mix difficult trading conditions thanks to Brexit and we could see Britain's late payment crisis deepen significantly."

Impact of new payment reporting rules

The new measures implemented by the outgoing government in April are designed to drive up standards in payment practices by improving transparency in an attempt to tackle the chronic issue of late payments made by larger businesses to their suppliers. Large businesses² will be required to report on their payment practices twice a year, including whether they pay their suppliers on time. Failure to report carries a risk of criminal proceedings.

Crossflow Payments points out that large corporates are unlikely to reduce their own working capital by paying suppliers faster, particularly in the face of difficult trading conditions thanks to Brexit uncertainty. Therefore, they may respond to the changes by trying to implement longer payment terms so that they are not seen to be paying late.

SMEs unaware of new measures

Crossflow payments believes that most SMEs are poorly placed to push back against corporates that seek to extend their payment terms. One of the reasons is that almost four in five (78%) SMEs were unaware of the new reporting obligations, a new duty forcing larger business to publish details of their supplier payment terms and practices to drive compliance with their payment terms to suppliers. The lack of knowledge means that SMEs won't be able to use the leverage of the payment obligations in their negotiations with their large corporate customers. Crossflow Payments points out that many SMEs are dependent on contracts from large customers, creating an unequal playing field when it comes to negotiating payment terms.

Tony Duggan continues: "The future government must build on the initial momentum of the guidelines and actively support new ways in which the late payment problem can be solved, such as through alternative finance platforms.

"This election campaign has seen broad support for SMEs on the late payment issue and it is vital that talk turns to action for the next Government. Such action should include ensuring The Small Business Commissioner is appointed on time and given the necessary support to begin monitoring and publishing payment terms. Government should also consider the potential role innovative solutions, such as supply chain finance, can play in helping to square the circle of working capital needs for both SMEs and large businesses.

"As the lifeblood of the UK economy, we cannot afford to ignore the late payment problem facing SMEs any longer."

All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1031 SME senior decision makers. Fieldwork was undertaken between 10th and 19th April 2017. The survey was carried out online. The figures have been weighted and are representative of all GB businesses in terms of size (i.e. employees).

Methodology

¹ Business Population Estimates for the UK and Regions 2016. Number of SMEs estimated at 5.4m in 2016. Working conducted by Instinctif Partners.
² To qualify under the new obligations, businesses must have exceeded two or more thresholds: £36 million or more annual turnover; £18 million or more balance sheet total; 250 or more employees.
³ Business Population Estimates for the UK and Regions 2016. Annual turnover of UK SMEs in 2016 estimated at £1.8 trillion, with 15% of SME turnover subject to late payment according to the YouGov survey.