Late payments persist despite new regulations

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The economic clouds are dissipating, but big businesses are still tardy in paying their SME suppliers.

As 2017 is consigned to history, it appears that while the year was no picnic for smaller businesses the UK economy held up better in the immediate post-Brexit period than many analysts expected.

Manufacturing output returned to its highest level since early 2008, when the global financial crisis began casting shadows over the economy. It’s also likely that Britain’s growth, subdued in the early months of 2017, edged higher in the second half to hit 0.6% in the fourth quarter.

Does the better news also extend to prompter payments for the UK’s 1.7 million smaller businesses? Yes, up to a point – data suggests the advent of the Prompt Payment Code has helped reduce the problem of late payments. Last July, Bacs, the company which runs Direct Debit and the Direct Credit Scheme in the UK, reported that SMEs were owed a total of £14.2 billion in overdue payments; a significant improvement from the figure back in 2012, when the total stood at £30.2 billion.

Despite this, nearly four in ten small businesses report that they still wait beyond the agreed term for payment, while the same number spend up to four hours per week in following up with late payers. Almost a third wait at least one month beyond the stipulated time before receiving payment and for nearly 20% the delay is more than 60 days. One in eight firms employs an individual specifically for the task of chasing overdue invoice payments.

All this delay still costs SMEs in excess of £2bn. Bacs also found that nearly one in five of SMEs pursuing late payers revealed that an unpaid invoice of between £20,000 and £50,000 would be enough to tip them into bankruptcy and 7% admitted that they were teetering on the edge. Assertions that the Prompt Payment Code is driving a change in payment culture should be taken with a pinch of salt.

Stalled progress

Payment terms and late payments is an area that C2FO also focuses on in its Working Capital Outlook Survey, the latest edition of which was published in January 2018. The new edition finds that progress towards improving the payment practices of big business may have stalled a bit in the past year. This is despite regulatory pressure such last April’s requirement that major companies start reporting twice-yearly on their payment practices and performance.

The C2FO survey, which includes responses from SMEs in the US, China, India and Europe’s top four economies, confirms that late payments are by no means just a UK issue. SME executives in China and Italy report even more significant payment delays than their peers in the UK, US, and Germany.

Since C2FO’s previous survey appeared just over a year ago SMEs in both the UK and the US report the number of clients that they supply who have imposed longer payment terms has doubled.

Not only have payment terms been extended over the past year in ways that negatively impact on SME supplier cash flow, small businesses in the UK, US, and Germany that participated in the latest survey report an increase in payment delays by large corporates.

Yet major European companies have been enjoying the most favourable conditions in years. Even the Eurozone’s sicklier economies have emerged from recession, helped by strengthening demand and the European Central Bank’s policy of ultra-low interest rates coupled with an economic stimulus programme.

The latter has seen the ECB as a major purchaser of corporate bonds since mid-2016. At the beginning of this year, the central bank was the proud owner of €131.6 billion of corporate debt, of which €80 billion came from purchases made in 2017. However, its largesse is showing signs of waning. In December, the ECB added just over €3 billion to its holdings; less than half the level of the previous three months and the lowest since its buying programme got underway.

With signs growing that Europe’s economies can again stand on their own feet, the ECB tap is likely to be turned off sooner rather than later. At the same time, 2018 could also see efforts step up to close the biggest channels for corporate tax avoidance in the wake of the revelations provided recent months by the Panama Papers and Paradise Papers. With two major contributors to buttressing the bottom line of multinationals now threatened, it would be naïve to hope that big businesses are keen to tackle their poor payments culture right now.

“It is a reality in today’s financial landscape that large corporates eager to maximise and maintain their cash positions are unlikely to change their payment postures soon,” concludes the latest C2FO survey. SMEs are aware of this and more say they are open to alternative sources of financing, including offering customers a discount in return for early payment, a strategy that can offer lower costs than other funding sources for cash flow.