Time to get tough on the UK’s slow payments problem

Slow business payments are one of the major challenges facing economic growth, both in the UK and globally. Therefore it is right that it is being made an urgent priority by the Government.

The Chancellor’s urgent talks on tackling slow payments and the announcement that seventeen companies have been removed from the Prompt Payment Code for failing to pay suppliers on time are a start, however, there is much work to be done. The conversation needs to move on from simply calling late payments unacceptable and naming and shaming slow payers.

The current landscape

Slow supplier payments are a major problem for SMEs in particular. Research from Previse shows that on average, large companies take around 60 days longer to pay their smaller suppliers versus their largest suppliers.

Those suppliers that need to be paid the fastest have to wait the longest and this is having a troubling impact. For small firms without the financial backing to sustain this hit to their cash-flow, working with large buyers can be impossible and seriously limit their ability to scale. Slow payments cause almost a quarter of UK insolvencies and they directly force 50,000 SMEs out of business in the UK every year.

However, it isn’t as simple as flicking a switch and suddenly paying small suppliers months earlier. Invoice approval and payment is an extremely manually intensive process and cash-flow forecasts are carefully balanced on certain expectations around supplier payments.

The current payments process in most firms is extremely manual, paper-based and time-consuming. A tier one bank Previse worked with processes 760,000 invoices per year, that’s more than one invoice every minute of every day. According to a 2018 study by Concur^[1], the average invoice requires 21 people in order to be checked and approved.

Alleviating some of the burdens of invoice processing through basic automation would also be difficult. Currently, 57% of invoices are submitted to firms by post (this is fairly consistent across businesses of all sizes). Of those invoices submitted electronically, most are a PDF attached to an email which, for most simple automation processes, is barely more useful than a paper invoice. This is because, without advanced artificial intelligence, it isn’t possible to take the unstructured data in a PDF invoice and convert it into a machine-readable format or automated processing.

To enable some automation in the invoicing process, many firms have turned to technologies such as e-invoicing. An e-invoicing system records invoice data in a standardised format which allows for greater levels of automated checking and can significantly speed up processing times, as well as cutting down on mistakes.

However, these systems have been met with mixed success. The complexity and cost of including suppliers in e-invoicing are significant. One study estimates the cost of onboarding a single supplier to an e-invoicing system is $925, requiring seventeen hours of work and taking sixteen days to complete.

We are also aware of recent cases where suppliers were asked to pay over $4000 to join e-invoicing platforms. Given these costs, it is hardly surprising that the vast majority of e-invoicing systems are processing invoices for only the largest few suppliers. While these may be the invoices with the highest value, it leaves a very long tail of invoices which have to be processed manually.

What can be done?

New technology can play a pivotal role here, enabling early payment programs which can get suppliers paid straight away while mitigating the risks to retailers’ cash-flow through the use of data analytics and payment insurance.

Th fact is most businesses would rather pay their suppliers faster but approving and paying invoices more quickly is a massive logistical and financial challenge. This means that despite the attempts from the government to address the problem and the dire consequences of slow payments being well known, resolving the issue is difficult. To be ahead of this, buyers urgently need to address the problem, in an economically sustainable way. They need to move away from the ‘this is how things have always been done’ mindset, towards one which is open to change.

By bringing artificial intelligence into the payments process, we can use invoice data to predict early on which invoices are going to be approved and paid. We can then pay the supplier based on this prediction months before the buyer has gone through the laborious invoice checking process. For an SME supplier, the benefits would be palpable: early payment financed at a rate dependent on the credit-worthiness of the buyer. For the buyer, such an innovation would allow them to maintain or potentially increase their payment terms, furthering their working capital requirements whilst maintaining good supplier relationships.

There are technology-based solutions already in the market which have strong support from SMEs and the Small Business Commissioner and, while it is clear that the government is not ignorant to the UK’s longstanding late payments problem, what is needed is decisive action that calls for greater collaboration between buyers and suppliers.

Without a change to the status quo, the UK’s reputation as an attractive market for small businesses to grow and scale will be seriously harmed. A starting point should be to publicly list companies that fail to pay suppliers on time, to serve as a deterrent. Once the gravity of the issue is made known, harnessing the opportunity that artificial intelligence presents to the B2B payments market should be grasped, before it is too late.

By doing so, buyers can ensure that none of their suppliers are paid late and do so in a fully sustainable and economically advantageous way.

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