Regularly facing late payments from buyers is threatening the existence of businesses of all sizes, with smaller businesses most acutely affected, according to a report by the Association of Chartered Certified Accountants (ACCA).
The paper Ending Late Payment: Reflections on the evidence is the third in a series on the subject. It suggests 30% of payments made to businesses in the UK are outside of agreed terms – with between 16 and 21% not being made until more than 60 days after the initial service.
The report claims the prevalent culture of late payments is largely down to the lack of a financial infrastructure that can boost trade credit. It goes on to urge new secretary of state for business, innovation and skills Sajid Javid to put such a structure in place to help all businesses; but especially SMEs.
ACCA spokesperson Andrew Leck commented that ending late payments “has proved to be an elusive goal for governments across the world”. One way the report by ACCA urges Javid to do this is to tighten regulation around late payment credit.
“What the UK Government needs to recognise is that late payment is essentially a demand for credit and start tackling the problem as such,” Leck contiuned.
“The efforts of our incoming Business Ministers need to be fully focused on building a financial infrastructure that boosts trade credit through support of alternative finance and the free availability of credit information.
“This approach has the potential to be far more effective than the measures currently proposed around improving the legal framework for late payment disputes and ensures that Government policy makes a positive difference far earlier.”
The paper outlines nine conditions to be met for sustainable trade credit. They are:
- Buyers’ and suppliers’ standard terms of credit should be transparent.
- Cash flows to suppliers should be predictable through explicit credit policies and contract terms.
- Invoicing, collections, accounts payable and invoice dispute processes should be efficient and transparent, with senior staff taking responsibility.
- The status of invoices should be easily monitored throughout their lifetime.
- Suppliers should be aware of the cost of providing credit to customers.
- Differentiated pricing should reflect the suppliers’ cost of capital, so that neither they nor their prompt-paying customers are forced to subsidise late payers in the long term
- Customers and suppliers should give each other adequate notice before seeking new terms of credit, so that alternative financing can be sought in time.
- Suppliers should seek to understand, and customers should be honest about, the causes of late payment and the viability of late paying customers.
- Payment plans should be set out explicitly in contract terms and genuinely troubled customers should opt for these rather than resorting to late payment.
Further reading: Half of SMEs ‘permanent non-borrowers’