A survey published recently by payment service providers Bacs looks into the cost of late payments to small businesses. While we intuitively know that stalled or late payments can be, at best annoying, and at worst life threatening for a business, only the hardest hit business owners would fail to be surprised at the findings of the survey.

Bacs found that late payments have cost small businesses £9.4 billion. Today, the study states, small to medium sized enterprises are owed an enormous £39.4 billion in overdue bills. This is compared with the £30 billion in overdue bills that was recorded the in the last survey by Bacs taken just over a year ago. A rise of £9,400,000,000 in a single year is nothing short of incredible. On a macro-scale, these figures are striking enough, and one cannot fail to understand the potential such unacceptable revenue deficits have for hurting smaller businesses. However, the picture becomes much clearer when seen on the scale where the pain will actually be felt.  erase.debt_

 

Pain on scale

The average small business in the UK is owed over £38,000 in unpaid bills. A quarter of these companies told Bacs that if this were to rise to over £50,000, bankruptcy would be inevitable. One in four small to medium sized business owners surveyed say they spend up to 10 hours per week chasing these overdue payments. This wasted time can easily translate into rapidly rising labour costs, resource inefficiency and, most certainly, lower morale; who would want to spend their time chasing up money that is already theirs?

As discussed in other blog posts on this site LINK?, having a depleted capital reserve can be a serious and lasting hindrance to growth. This is aside from the secondary effects that can occur from having such high value outstanding arrears. Doing business in the modern market means that time is ever-more precious. The demands of 24-hour marketing, with so many manifold media types, their diffuse requirements, and the mantra of ‘you can always do more’, mean that wasting hours chasing up unpaid invoices will invariably hurt your marketing capabilities.

Perhaps the most galling statistic created by the survey is not the sheer value of the debt owed to small businesses by late payments. Rather, it is the amount that large businesses are owed in late payments: just under £7 billion, or around 17% of the total amount owed to small and medium sized enterprises. This is unequivocally shocking, and one is forced by the comparison to draw conclusions to try and make some sense of the disparity.

Where’s my money?

One obvious conclusion is that bigger businesses can afford to employ people in the specific capacity of debt-collection and invoice clearing. Having someone dedicated to ‘banging on doors’, as it were, makes it much less likely that invoices will go unpaid in any large amount or for any amount of time. Indeed, this seems immediately logical; whatever my intentions are, I am unlikely to forget to pay KPMG for services rendered, as their constant reminders will ensure that I don’t.

Yet, with most big companies, the sending of reminders is often unnecessary, and herein lies the more interesting and, I feel, more truthful conclusion. I am aware without ever having dealt with PwC, for instance, that they have the machinery in place to prosecute me promptly if I fail to pay them. I am also aware that they have no intention of doing so if it can be avoided, but I am more inclined to pay on time given my knowledge that their finances would not be significantly damaged by a legal battle. The converse is true of small/medium sized businesses, who often struggle to find either the time or the money (or more commonly both) to properly market their products, let alone fund a couple of days in small claims court.

Herein lies the real reason that small businesses are, en masse, owed so much by customers; regardless of intentions towards your business, I am less inclined to part with my cash until I am forced to, if I am comfortably sure that I will face no repercussions from paying so late. It is certainly a psychological phenomenon that we will subconsciously push costs that are not urgent to the back of our minds, but an overt culture of late payment exists in the UK, plain and simple, and it is starving small businesses of their cash; effectively cutting off their blood supply. My late payment may be far from malevolent, but it is also far from altruistic, and still a great distance from fair.

 What are we to do?

Emulating or even trying to emulate the litigious resources of the major corporations, and even businesses two or three times your size, is going to be a largely fruitless effort, with benefits either being non-existent or too dependent on the perceptions of your customers. I do not need to know you, as a small business owner, to know that you simply don’t have the time, and that trying to find it will either kill you or your business.

Legislation has been drafted that seeks to rectify this problem by introducing a Prompt Payments Code, a totally voluntary best practice agreement, as well as a rule which eventually forces companies to make their payment process more transparent. What the actual purpose of this legislation is remains beyond the comprehension of this author, but it does represent something very clear; legislative weakness and a reluctance on the part of the executive to demand even the most reasonable of terms from big businesses. Understanding this lack of will from those in a position to help is vital if the problem is to be approached.

The feebleness of the proposed legislation in confronting such an enormous problem demonstrates the need for an extra-judicial solution. Here history is, as always, the perfect teacher. Historic instances of commercial injustice resulted in the birth of the unions. The dwindling of the unions’ power has been mirrored by a not-unrelated rise in the small business owner’s importance for the UK economy. So too has risen their exploitation by larger businesses and individual customers. This author is in no way suggesting forming yet another industry association; the world is awash with enough acronyms as it is, and their effectiveness in dealing with these problems is limited.

Rather, what one must do is a similar process of resource pooling, but in a limited way. Joining with a number of other businesses that are failing to recover costs from larger companies and putting up a united front could have very powerful consequences on its own. The power of these consequences could be multiplied if a concerted embargo could be placed on the provision of further services to the larger company. While finding a different supplier for a particular product or service can be short work for a large company, finding different sources for a wide range of goods and services can prove enough of an annoyance to force a prompt payment.

This also applies to negative PR promotion. One voice of complaint falls on willingly deaf ears. However, encouraging other businesses who are owed significant sums of money by the same purchaser to promote their grievances on social media will give your claims for impetus. If this negative campaign gathers momentum, bringing it to the attention of local newspapers and trade magazines can cause enough professional embarrassment for the debtor company that there is never a late payment again.

On the individual

This rather radical and abstract sounding advice only pertains to big businesses. It is necessarily radical and abstract, as combating the unwillingness to pay promptly of many monolithic corporations and conglomerates is, sadly, a tiring band uphill battle. Much more concrete advice can be given to those seeking redress from individual customers who are failing to pay invoices on time.

The simplest way to avoid the costs of late payments from individuals is to insist on upfront payments. While this is a common problem for many customers, the immediate negative feeling that many of us have toward parting with our cash pre-service delivery can be assuaged somewhat by use of an escrow account. These accounts are easy to set up and easy to use for the customer, and can present an excellent compromise for both parties; the customer has technically already parted with his or her money, but it cannot be released to you until your services have been delivered in full. If there is any dispute post-delivery, then there is a clear corporate, and if necessary legal, structure for resolving such disputes.

Another method for encouraging swift payment is introducing penalties for late invoice clearance. Seeking advice from credit clearance companies and lawyers before hand is a necessity, but it will undoubtedly pay off in the end when you spend less and less time each month having to chase up unpaid bills. Furthermore, the rising bills will serve to off-set the time wasted by chasing money that you have already earned.

Above all else

As a small business owner, you need to protect yourself, but in doing so you have a duty to help other s protect themselves from the same issues. This cannot be done in a better way than joining the already substantial effort in lobbying the government to introduce the laws that you require to merely stay in existence. The support for legislation is there, but as we have seen, the will to give it teeth is still lacking. By concerting efforts across the thousands of small businesses in the UK, a real voice can be created in calling for harsher penalties for late payments, and for more tools to be made available for small businesses in claiming what is theirs. Given the importance of small and medium sized enterprises in the UK economy, one would not think this too much to ask. Perhaps nobody has been asking clearly enough?