How late payments are crippling SMEs

Of all the things start-ups need to be concerned with, managing cash flow may just be at the top of the list.

Outside of lack of market need, cash flow is the biggest reason for start-up failure and, with half of SMEs out of business by year five, not receiving money owed on time is a huge problem for small businesses.

Particularly over the last ten years, a worrying culture of late payment has arisen in the UK, with the average SME owed £24,841 in unpaid invoices, and a quarter due over £40,000off the sales ledger.

Such numbers are critical in the world of small turnover business, so why is this happening and how badly is it damaging the SME market?

David vs Goliath: an unethical trend

Year on year, late payments are getting worse in the UK. Indeed, the trend of paying as and when it suits has become a significant ethical issue, and one that’s led by the country’s biggest blue chips.

As far as the big corporates are concerned, late invoice payments equal good business sense in regard to their own cash flow. However, for SMEs whose survival is based on one or two of these major contracts, the blasé payment approach of their big-name debtors is crippling them to their very core.

Despite government initiatives designed to crack down on late payments, small business owners are reluctant to kick up too much of a fuss in fear of damaging their relationships and losing integral sources of revenue.

Furthermore, SME’s unwillingness to devote resources to proper credit control mean unpaid invoices often go un-chased and left to be sorted on the customer’s terms.

What are the knock-on effect of late payments for SMEs?

Whilst the blue chips balance their own books, what do late payments actually mean for SMEs? The stark reality is that the impacts are significant enough to put many smaller operations out of business altogether.

A sales ledger riddled with outstanding invoices has a knock-on effect to an SME’s purchase ledger, with most then unable to pay their own creditors on time. Without the intimidation factor or financial clout of a big business, many SMEs risk damaging their relationships with key suppliers, all while further exaggerating the late payment problem.

With cash flow stunted, many businesses have to pull back on key spend, including hiring of new staff, investment in new equipment, marketing campaigns and remuneration increases for their employees.

What’s the solution?

With no suggestion the payment issue will disappear anytime soon, SMEs are having to look to alternative methods to supplement their cash flow.

Incentivising early payment of invoices with discounted fees is an option for businesses willing to eat into their profit margin in exchange for more consistent cash flow. Whilst effective, such a tactic can set a precedent for lower invoicing across the board, which could have longer term implications.

Invoice discountinghas become another choice for SMEs looking for regular, guaranteed cash injection. In exchange for a set rate, financing companies will offer substantial cash advances to SMEs with their money tied up in unpaid invoices, offering businesses a controlled way out of the current cash flow crisis in the market.

Neither are an ideal solution, but many businesses are willing to sacrifice the numbers on their P&L in exchange for being more cash rich.

With the big bullying the little, and others picking up on the trend, the culture of late payments and unpaid debts looks like it’s set to plague the SME market for some time to come. With such substantial statistics regarding start-up failures, the question remains how many more small businesses could survive if they were just paid on time.

Photo by Alexander Mils