MEPs want to crack down on late payments to small businesses – but what would really help?

High inflation and energy costs have grabbed the headlines in recent months, but there’s another problem small businesses are quietly struggling with: late payments.

According to the Federation of Small Businesses (FSB), the problem of late payments by businesses has “stretched out of control” and is pushing businesses to the limit.

FSB research has found that 50,000 business closures could be avoided each year if late payments were made on time.

While the government has launched a review of enforcement of the payment rules, small businesses are routinely forced to collect missing cash from the businesses they supply.

Late payments can cause cash flow problems and stretch small businesses to their limits

This often leads to liquidity problems and jeopardizes livelihoods.

Now a new YouGov poll shows most MPs want stricter measures to tackle late payments.

We examine how late payments affect small businesses and what steps could be taken to help them.

“I helped a company get listed on the FTSE and then had to beg them for £60,000.”

A late payment can be critical for a small business. Polly Arrowsmith recalls running an IT-managed hosting company, often having to leave big brand names behind for payments.

In particular, one customer whom Arrowsmith helped get to the FTSE 250 by building its data center refused to pay an invoice worth more than £60,000.

“My main supplier had given me a 12pm deadline to pay his bill or they would just stop our services and our business would go under,” she said.

“I was begging for the bill to be paid, it was very stressful.” At 11:57 they paid us. “I had prepared to tell all my employees that they were out of work and the client that we had failed.”

Sophie Wright, founder of the consulting firm WrightCFO, has also found that big companies are the worst offenders. Her consultancy engages contractors before placing them with companies.

She has mainly worked with start-ups or SMEs and has never had to write off debt in nine years.

But that was before she hired an international company that started paying later and later until it was a few months behind.

“Finally, they just stopped paying,” Wright said. “They went into liquidation and owe me bills for two and a half months.” The consultant had to pay and I was obliged to pay, but I couldn’t afford to pay the entire cost myself. I had to enter into a payment plan to pay her.’

Since then, Sophie has changed her contracts with consultants so that they can only be paid if the client pays. “I’m tired of taking on very large clients in the future,” she added.

What is the government doing to help?

The definition of timely payment for small business suppliers, according to the Prompt Payment Code (PPC), is paying 95 percent of small business invoices with fewer than 50 employees within 30 days.

However, the code is voluntary and research by the FSB found that most small businesses struggled with late payments in every quarter of 2022.

A YouGov poll commissioned by the UK’s largest accounting organizations – the Association of Accounting Technicians and the Association of Chartered Accountants – recently found that two-thirds of MPs think the PPC for companies with more than 250 should be made compulsory for employees.

There is also a desire among MPs to give the Small Business Commissioner (SBC) more powers. This body was set up in 2016 to tackle unpaid bills and the government is currently reviewing its role and effectiveness.

More than half of MPs agree that the SBC should be able to impose financial penalties for persistent non-compliance with the PPC.

The government already announced a review of late payments last December – particularly with regard to PPC and SBC – to prevent smaller companies from being ripped off by larger companies.

The Procurement Act, which introduces a 30-day payment period for public sector supply chains, is already in its final stages.

The Economy and Trade Department said its review would look specifically at the current payment reporting regulations and the PPC.

A spokesman for the business department said: “Our payments and cash flow review has taken a close look at existing payment practices, PPC and other measures to ensure small businesses are treated fairly by their larger customers.”

Seema Malhotra, Labour’s shadow secretary for small business, told This Is Money that the government is not doing enough.

Malhotra said: “Countless small businesses are held back by a culture that says it’s acceptable to pay them late.” But despite years of campaigning by small businesses and the first consultation over eight years ago, the Tories have failed to legislate enacted to make directors more accountable.

“Labor knows small businesses are vital to our economy. That’s why we set out how we would address late payment by law – by requiring large companies to report on their company’s payment practices in their annual reports.”

Small business owners tend to be skeptical as to whether anything can really be done about late payments.

“I don’t think it’s possible to actually legislate late payment,” says Arrowsmith. “If you choose to work with the big telcos and media, accept late payments.”

“I had a big media company that didn’t pay for a £23,000 project. They didn’t care that we went to small claims court and got a verdict. For them, they were and will remain a billion-dollar company.”

How to deal with late payments

Tracking late payments can be stressful and time-consuming, but it’s all too common.

The first step is to set up a system to deal with late payments as quickly and easily as possible. It is best to contact the customer before the payment is due to avoid chasing debt. However, if payment has not arrived, you should contact us immediately.

If a customer is consistently late, the FSB recommends that you consider whether you are willing to continue delivery on credit terms. Losing the order or the customer might be better than delivering the goods and not getting paid.

Even with the systems in place, some companies don’t pay on time. That means you need to consider your cash flow and ask whether you have sufficient funds to meet your obligations.

The FSB offers detailed guidelines for dealing with recurring late payments here.

Have you been struggling with late payments from a large company?

Send an email to angharad.carrick@thisismoney.co.uk with the subject “LATE PAYMENTS”.