finance

Don't worry about the bills: how can small businesses get over the issue of late payments?


Kate at the Bubble January 2012 Show.Photo: Tom PietrasikLondon, U.K.January 2012






Kate Pietrasik, who sells childrenswear, prioritises small businesses and web sales after two late payments from a large online client retailer

Although he started his business 10 years ago, Rob Drake, co-founder of Brave Spark Media, says he still worries about late payments. “When it was just me and the other founder, [being paid on time] was the difference between us paying our rent or mortgages,” he says. “As we’ve scaled up, and taken on our own staff, it almost becomes a bigger problem. While before you were worrying about your own bills, you’re suddenly worrying about 30 other people.”

According to the Federation of Small Businesses (FSB), there were 5.8m SMEs in the UK at the start of 2019. There’s been an increase of 69% since 2000, with 16.6 million people employed by a sector responsible for an estimated turnover of £2.2tn. Late payments are an everyday reality for many of them – research from Xero found 48% of invoices issued by small businesses are paid after their due date, amounting to a total deficit of £131bn (or £23,360 each). Entrepreneurs spend two working weeks a year chasing payments, and 44% say it’s had a negative impact on their mental health. The FSB estimates tackling this problem would add £2.5bn to the national economy.

Drake cites one supplier who was due to pay the company a five-figure invoice in March after the completion of a project. He’s recently received half of the balance but is still chasing the rest of it. He finds the audacity of it frustrating, and says late payments have meant the company has had to hold much more in cash reserves than it would naturally do otherwise. “You’re essentially saying you want a 0% interest loan, to prop up your business,” he says of late payers. “And you’re not just asking me, you’re asking my suppliers, all of my team as well. If you asked that of a bank, they’d tell you were to go. Why is it acceptable to ask a small business?”

Donna Torres, director of small and medium business channel and commercial operations at Xero, says the issue is only getting worse. “It’s the biggest business killer,” she says. An estimated 50,000 businesses fail each year in the UK because of cashflow issues, but Torres adds there can be other consequences, even if the business does survive. “A late payment debt can harm a firm’s credit score, making it harder to raise funds. Improving national productivity means helping companies get access to finance and addressing late payments, which tie up working capital and stifle innovation.” Indeed, when asked by Xero what they’d do if they always got paid on time, 27% of small business owners said they’d be in a better position to grow, and 29% said they’d be more productive.

The passing of the Enterprise Act in 2016 and the appointment of the small business commissioner aimed to tackle some of these issues. The act gave the commissioner powers to investigate complaints against large corporations and make non-binding recommendations on how disputes should be resolved. During the time Paul Uppal, the most recent small business commissioner, was in office, he published investigations into the payment practices of Holland & Barrett, Zurich Insurance Plc and G4S. Businesses also have the right to charge interest (8% plus the Bank of England base rate), and reasonable debt recovery costs, once an invoice becomes overdue.

Mature designer man working with a digital tablet in a beautiful home office.



Almost half of all invoices issued by SMEs are paid late, according to research from Xero and PayPal Photograph: BONNINSTUDIO/Stocksy United

For Kate Pietrasik, owner of the sustainable childrenswear company, Tootsa MacGinty, large retailers and department stores can be the worst offenders when it comes to late payments. “If a retailer is late paying it can spell the end for a small independent brand,” she says. “The exposure created by being present in these shops is great but they hold a lot of power – to drive down your prices, slap on a hefty 60- or 90-day payment terms … [and] if you refuse their terms or to give them discounts, they probably won’t work with you and they certainly won’t if you try to have a late-payment fine in place.”

After one large online retailer paid Pietrasik late two seasons in a row, she decided to walk away and now prioritises small independent boutiques and her own website. “We’re focusing on staying strong and small,” she adds, “not needing to grow big and unstable. We grew very quickly and were stocked in all of the major department stores, but it didn’t necessarily mean larger or healthier profits.”

And it’s not just big businesses taking advantage of their smaller suppliers, Torres says SMEs have a duty to pay each other on time, too: “Small business owners are busy people – and paying bills on time can often be a struggle. Paying a bill should be the first thing you do in the morning, whatever size business you are.”

While the appointment of a small business commissioner is helpful, Torres believes industry and government “need to go further and create a cultural change to resolve the problem … we believe the time has come for large firms to be obligated to pay their small suppliers on time”. But with the right support and technology, she says there are changes small businesses can make to minimise these issues, such as negotiating shorter payment terms. “With a long payment window, there’s more chance an invoice will get lost. Overcome politeness – asking for money is awkward at the best of times [but] don’t be afraid to ask for what you’re owed. An accountant can often help you with these uncomfortable conversations,” she adds.

At Brave Spark Media, Drake has shortened payment terms from 45 to 30 days, and now asks for up to 50% upfront before starting work on a project. “We also have invoice financing with our bank that allows us to draw down on the value of an invoice if it’s not been paid on time,” he says. He’s found using technology such as Xero helpful when it comes to keeping on top of which invoices are due, sending automatic reminders for payment, and creating bespoke payment schedules for individual clients. Above all else, he says it’s important to not take the issue personally. “That’s a real temptation but just stick to the facts – this is the amount that was due, this is when it was due, and these are the next steps.”

But it would be nice not to have to think about it at all, he adds. “My business isn’t chasing invoices. We make TV commercials, we make online films. That’s what I love doing, that’s what we’re good at.”

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