Digital Transformation » Technology » Credit Management » The late payment challenge

With almost a quarter of insolvencies (23%) being caused by late payment issues, it would be difficult for even the most sceptical to deny that late payment is a significant issue for the British economy.

Of course, whilst collapsing businesses are the ultimate price paid for late payment, the impact is much, much wider. Those companies that do manage to absorb late payment are still likely to face myriad problems as a result.

For example, the loss of income can stop small businesses from investing and growing, damage productivity and in many cases can have mental health implications on both business owners and sometimes other members of staff.

There is broad agreement on the problems and consequences of late payments for individuals, employers and the economy. But agreement on an effective solution remains elusive.

The voluntary Prompt Payment Code was introduced in 2012 and hailed as a potential solution by many. This voluntary code requires large companies to pay their suppliers within a maximum of 60 days – hardly a challenge for most businesses in the 21st Century.

Despite the less than challenging nature of the Code, only 2,000 companies have signed it. Of these, some are in breach of the code because they have payment terms beyond 60 days. There is very little enforcement of the code and no financial penalties are imposed for a failure to comply.

Belatedly recognising the shortcomings of the Code, since April 2017, the government has required companies to report on their payment practices on a half-yearly basis. Although this may provide some useful data for policy makers it has no discernible value in terms of changing behaviour.

There is a legal obligation to report the data but there is no legal action if that data provides great cause for concern i.e. theoretically if only 1% of all invoices are paid within agreed terms (irrespective of length) then no action whatsoever will be taken against that company. This point was far from uniquely demonstrated by Grainer & Worrall Engineering who paid suppliers within agreed payment terms in just 4% of cases for the six months from June to December 2017.

Driving change

A year ago, the much-heralded post of “Small Business Commissioner” was created. This was supposed to be based on the Australian Small Business Commissioner model i.e. a Commissioner with teeth to impose fines. Instead our Commissioner has no powers to impose fines and is widely regarded as toothless.

It’s not surprising that the SME community appears to have little confidence in his ability to make a positive difference. 84% of SMEs stated they did not believe the Commissioner would have any impact on their business according to polling by Close Brothers Invoice Financing in 2018.

In summary, the past decade or so has been characterised by a series of initiatives, legislative tweaks, voluntarism and reliance on big employers to do the right thing, all of which have failed to address the problem of late payments.

AAT has a strong interest in improving matters because 60% of its 140,000 members either work for or run their own SME and its 4,250 licensed accountants provide tax and accountancy services to more than 400,000 British SMEs. It’s a big issue for AAT members and an even bigger issue for members clients.

The time has come for Government to legislate to end the scourge of late payments once and for all.

AAT has made three key recommendations to the Department for Business, Energy & Industrial Strategy (BEIS) that should resolve the problem. These are:

  • that the Prompt Payment Code should be made compulsory for companies with more than 250 staff
  • that payment terms should be halved from a maximum of 60 days to a maximum of 30 days
  • that a clear, simple financial penalty regime for non-compliance should be introduced and enforced by the Small Business Commissioner

The campaign to deliver these changes has already gained substantial support from the SME community as well as the fashion, construction and recruitment industries.

Political support has been similarly impressive. The Green Party, Liberal Democrats and Scottish National Party back AAT’s campaign together with almost three quarters (73%) of Labour and Conservative MPs according to a recent YouGov poll.

The Chartered Institute of Credit Management (CICM) who operate the existing Prompt Payment Code, and the Small Business Commissioner also appear supportive.

Diverse and comprehensive backing for AAT’s recommendations for payment reform makes it increasingly difficult for the Government to continue to drag its heels and back the status quo.