I’d like to introduce you to James Smith. He runs a small cleaning business, Exterior Clean Scotland, in Lanarkshire, Scotland.
He recently won a contract with a well-known engineering firm that would have transformed his business and created new jobs for people in an area still suffering from the effects of deindustrialisation. It should have been the start of an exciting new chapter for James, his employees and the wider community.
But James was left with no alternative but to decline the contract.
Why? Because the client was mandating 90-day payment terms. In practice, this meant that James would complete a job and submit invoices on time but would have to wait three months to receive his money.
He would not have been able to pay his employees on time and cover the other costs of running a business, resulting in potentially significant cash flow issues. Therefore, he made the difficult decision to pass up the opportunity of a lifetime.
James’ story is, sadly, far too common. Across the UK, slow payments leave small business owners spending countless hours chasing up payments and sleepless nights worrying if their businesses will survive. All too often, it pushes them into business and personal debt.
Something must be done. Not only do slow payments destroy small businesses, they leave workers without a job, stifle innovation and cause huge amounts of waste in global supply chains.
But we should resist the urge to introduce new legislation to mandate that buyers ‘do the right thing’.
Our job is to advocate for SMEs and fight for them to get a fair deal. But legislation that imposes maximum payment terms actually work against the companies we are trying to protect.
Finance departments at large buyers are overwhelmed with hundreds of thousands of invoices, each formatted differently, which cannot be processed quickly without the aide of technology.
In order to pay every invoice within 30 days, buyers would have to only work with suppliers which could use standardised systems such as e-invoicing and supply chain finance (SCF).
These technology systems cost thousands of pounds to install and require specialist skills to understand and operate. This is a significant burden and is simply not practical for almost six million SMEs in the UK.
If buyers believe that the only way to meet their legal obligations is to use these technologies, the end result is that they stop working with many of these SMEs altogether. That would be a disaster.
So does that mean we should give up on SMEs getting paid then and just accept slow payments as a painful but necessary part of doing business?
No. But we need to understand that addressing these issues is complex and cannot be solved by simply mandating businesses to pay SMEs faster.
Fortunately, with developments in technologies such as machine learning and data science, we are seeing a new industry of instant invoice payment services which will actually deliver for SMEs.
Working on data taken directly from the buyers’ systems, instant payment technology analyses the buyer’s data to predict the very few invoices that are unlikely to get paid, so that the rest can be paid early. This technology comes with none of the prohibitive onboarding costs of technology like SCF or e-invoicing.
Role of Government
So, what can Government do to help SMEs to get paid faster?
We need the Government to keep up the moral pressure on business to keep slow payments on the corporate agenda. But, at the same time, the Government must resist the urge to reach for simple solutions which generate positive headlines but risk hurting the very businesses they are trying to help.
Britain’s small suppliers are crying out for an end to slow payments.
By working in partnership with business, encouraging the adoption of technologies which offer sustainable solutions to the problem and by setting an example, the Government has the opportunity to make a real and practical contribution to changing the culture of slow payments.