The time has come to ban payment of invoices after 90 days to signal the end of Britain’s late payment culture and deliver a much-needed boost to small and medium-sized businesses.
SMEs are being stifled by a lack of funding from traditional banks, which has cost the UK economy an estimated £2.9bn in lost turnover in the last five years, according to research by Funding Options. As a result, the alternative finance market has grown substantially with a 22 per cent increase in the number of small businesses turning to crowdfunding platforms and other, non-traditional sources of finance in the last year.
Recognising the need to support small businesses, the government is planning to introduce the Small Business, Enterprise and Employment Act next April.
Key measures include opening up access to small business credit data and a commitment to increasing access to alternative finance.
In addition, banks will be required to pass on applicants’ details to other lenders if they have refused credit for any reason. The introduction of a Small Business Commissioner next year along with a free mediation service for businesses will add further pressure to the situation and help to address the biggest problem of all for small businesses – late payments.
But while the government is taking action, it is unlikely to have a huge impact. These measures alone will be insufficient to address Britain’s late payment culture.
More pressure may need to be applied and, while the government has said it doesn’t intend to name and shame late payers because of the impact this could have on trading relationships, this could well become necessary.
According to the Asset Based Finance Association (ABFA), SMEs wait an average of 72 days for invoices to be paid – one day more than this time last year – despite the improved economic climate.
Our own data reveals some SMEs have waited as long as 121 days for invoices to be settled.
The recent decision to lift a ban on assignment rules, which previously prevented smaller suppliers from using invoice finance as a source of funding, w|ill help. Tesco’s move to introduce ‘fairer’ payment terms for its smallest suppliers will also mark an improvement.
However, in reality there is little power to actually enforce a fairer payment culture, and more needs to happen.
The best way to do this would be to outlaw the practice of paying beyond 90 days, an approach which has already been adopted in the US, Canada and Australia. Simply leaving something this important to the discretion of individual trading partners is unlikely to work.
Without action being taken at this level, SMEs will remain on the back foot, unable to press for change without putting customer relationships at risk.
Of course, businesses must support the drive for change and do what they can to raise awareness of this issue, but they should also be pragmatic and look for alternative ways to facilitate growth in the meantime.