Small and medium sized enterprises are the backbone of the UK economy. They are integral to continued economic growth and are a feature of everyday life for the vast majority of UK citizens. The problems they face impact us all. Right now, late payments are one of the biggest issues affecting these businesses. Research from Barclays shows that three in five SMEs are currently owed money from late payments.

Late payments leave many SMEs struggling to maintain healthy cash flow, putting their futures at risk. And a struggling small business sector affects everyone within the supply chain, including large organisations and the UK economy as a whole. It places additional pressure on every aspect of the country’s economy, at a time when many companies could do without it.

The bigger SME picture

At the start of 2021, SMEs accounted for 99.9% of the UK’s business population (GOV). The UK government distinguishes between micro, small and medium businesses in the following way (GOV):

• Micro business – less than 10 employees and an annual turnover under £2 million

• Small business – less than 50 employees and an annual turnover under £10 million

• Medium business – less than 250 employees and an annual turnover under £50 million

This distribution demonstrates just how dominant SMEs are in the UK commercial landscape. They outnumber any other type of business by a considerable amount and are the principal driving force behind the UK economy. Though they may be the driving force, they’re by no means in the driving seat. Often, smaller businesses are at the mercy of the larger organisations they interact with.

Nowhere is this more evident than the issue of payments. Larger companies typically have the power to dictate payment terms to SMEs. This results in long terms that can impact cash flow and put them under significant pressure. Even worse, some larger companies regularly break the terms of the arrangement and pay late, leaving some small and micro businesses struggling to make ends meet.

However, late payments are not just an issue for smaller businesses. They affect larger companies, too. In this series of blogs, we look at how late payments impact the entire business landscape – from sole traders to multinational corporations. Today, drawing on our recent conversation with Liz Barclay, the Small Business Commissioner, we begin by providing a general overview of the effect late payments have on organisations of all sizes.

State of late payment

In a recent conversation with the Small Business Commissioner, Liz Barclay highlighted how widespread late payments are. “We’re still seeing around 40% of invoices not being paid to terms,” she noted. “15% of those invoices aren’t chased by small businesses because they simply don’t have the resources.”

However, it would be wrong to suggest that this is an entirely new problem. The power imbalance between larger organisations and the SMEs that play vital roles in their supply chains has existed for many years: late payments have caused issues in the past, just as they do now.

“E-commerce and cloud accounting solutions have made a lot of difference over the last 15 years,” Liz Barclay explained. By automating key processes and ensuring there is greater transparency in the payment process, digital technology has ensured average payment terms have gradually decreased.”

However, small businesses still struggle to chase invoices. They do so for a range of reasons. Chief amongst them are a lack of time, money and staff availability. Smaller businesses often operate on slim margins, with little room to manoeuvre. This means they can’t chase payments without impacting other areas of the company. Even when they can do so, there is no guarantee that payment will be made promptly.

Let’s take a closer look at what late payments mean for small and medium sized businesses.

Late payment is a productivity problem

UK SMEs spend 900,000 hours a day chasing and dealing with late payments. This is a remarkable waste of companies’ time and resources and considerably impacts other aspects of the business. Essentially, time spent processing late payments is time not spent on tasks that add value to the business.

Liz Barclay argued convincingly that this makes late payment a productivity issue for small and micro businesses. “It’s time that you’re not putting into planning your business, building your business or thinking about getting new customers,” she said. Repurposing staff to chase late invoices or taking time out of your day to try and organise payment means you cannot focus on those parts of your business that matter most.

In an increasingly competitive business landscape, productivity is key to realising an advantage over your competitors. Small businesses need every spare minute they can muster to stay afloat, maintain momentum and continue growing. Robbing smaller organisations of that time will lead to more firms struggling and fewer surviving.

Uncertainty is the enemy

Long payment terms – where companies arrange a latest payment date that is relatively far down the line – can be problematic. However, they are nowhere near as much of an issue as late payments. This is because late payments introduce an element that no small business can account for – uncertainty.

Long payment terms might not be ideal, but at least they guarantee the small business will receive payment by a specific date. This allows the business owners to plan and mitigate the long terms. Business owners cannot plan for late payments. They do not know when they will receive payment, and they have no way to compensate for, or plan around, the large hole in their finances.

Liz Barclay explained why this is such a significant issue. “Purely economically, small businesses go to the wall if they can’t manage their cash flow. They can’t manage their cash flow if there’s no certainty, and they don’t know when they will get paid. They need to know when the money will hit the bank account.”

Uncertainty doesn’t just make it challenging to plan. It also makes small businesses wary of investing in their future. As Liz Barclay suggested “Small businesses won’t invest in skills, new jobs, training or equipment unless they have certainty”. Why would an SME increase investment in these parts of their business when they don’t know if they will have the cash to pay for them in the future? In this sense, uncertainty stifles innovation and growth, preventing small businesses from fulfilling their potential and damaging the wider business environment.

Supporting a stronger ecosystem

The idea that late payments only impact small businesses is patently false. Though we will look at how late payments also affect larger companies in greater depth in upcoming blog posts, we will touch on the subject here.

Large companies do not operate in isolation. They’re part of a diverse business ecosystem. Big businesses’ supply chains are made up of small businesses, and they depend on them to manufacture, market and distribute their products. While it may seem as though these larger organisations are insulated from the problems of small businesses – they can, after all, replace one SME partner with another – this couldn’t be further from the truth.

Big businesses need to protect their supply chain to insulate them from potential economic problems and to minimise the chance of disruption. When a partner SME goes out of business, it is disruptive. That disruption may be manageable when things are going well and financial forecasts are optimistic. When things aren’t looking quite as good and larger companies are facing other business pressures, that disruption can be highly problematic.

Liz Barclay spoke to us about her perspective on late payments and their impact on the wider business ecosystem. She warned larger businesses that late payments are creating problems and the effects will be felt in the future. “The next time that you need that talent that contributes so much to the success of your business, it’s not going to be there,” she said. “And then it’s going to cost you a lot more to go out and look for new suppliers who can do that job.”

In some respects, recent events made larger organisations realise the importance of a healthy ecosystem to their operations. “The pandemic made many big businesses realise that, if they didn’t nurture and look after their suppliers, they would go to their rivals or be put out of business,” Liz Barclay said. “Until we start getting that message to bigger businesses, they won’t see that they’re shooting themselves in the foot.”

Small business owners are struggling

For small and micro business owners, late payments aren’t just an operational issue. They dramatically impact how they live their lives and support themselves. Liz Barclay recounted a call the office of the Small Business Commissioner received from a business owner who was suffering because they were not paid on time.

“We had one woman who phoned to tell us that she had no money to feed her children over the weekend,” she described. “When the case officer then phoned the bigger company and spoke to the CFO, the CFO admitted that it had never occurred to them that £300 could be so important.”

In many instances, larger businesses are not maliciously denying payment to cause harm. They simply do not recognise that their payments can be the difference between a small business owner being able to put food on the table or not. In some ways, this is understandable. Big businesses deal with much larger sums, operate on a different scale, and in a more bureaucratic environment. In this environment, the human impact of business decisions and actions is less clear.

In the case of the business owner unable to feed her children due to late payment, making the larger organisation aware of the human cost of late payment resulted in action. “The company’s CFO asked the case officer for the small business owner’s personal bank account details, and they paid her directly there and then,” Liz Barclay recounted.

Tackling mental health concerns

The example cited in the previous section highlighted the financial cost of late payments to small business owners. This cost is considerable and clear to see. However, there are more insidious costs that are harder to measure but no less problematic. The most significant is the toll late payments take on small and micro business owners.

“Late payments aren’t a purely economic problem,” Liz Barclay noted. “For small businesses, micro-businesses, freelancers and sole traders, they can cause sleepless nights. And sleepless nights lead to mental health problems. We are increasingly seeing people with mental health problems because they’re being paid late or not being paid within reasonable terms.”

It is easy to forget that late payments can have deeply personal ramifications. On a personal level, employees at larger companies are largely insulated from the repercussions of everyday business processes. Their income is not dependent on the outcome and efficiency of key business processes. Whether or not there are problems, they typically still receive their monthly wage slip.

That’s not true of small business owners. Their personal lives are deeply entangled with their professional lives, and they face an entirely different set of workplace pressures. The uncertainty associated with late payments (discussed earlier in the article) puts tremendous pressure on business owners, which manifests as considerable stress. The emotional toll can be enormous.

Conclusion

As this article demonstrates, late payments significantly impact small businesses and their owners. While the most obvious effect is financial, with smaller companies struggling or going out of business, there are other underlying effects that we take for granted. Late payments prevent small businesses from investing in their organisation, reducing productivity and holding the economy back more generally.

At the same time, late payments have a real and very worrying impact on business owners’ mental health and ability to make ends meet. Cash flow uncertainty puts SMEs in a position where they’re operating on a knife edge and constantly worrying about the future. This is unsustainable, and burnout in small businesses is becoming a genuine concern. 

Of course, late payments also affect larger businesses, most notably by creating insecure supply chains that are open to disruption. However, large companies also benefit from making payments on time. We will examine those benefits in an upcoming blog post soon.