Late payment is one of the biggest issues facing small businesses today. Our new research shows just how big that problem is.
While the government is taking action to create a more responsible payment culture, we believe more needs to be done.
First, we want to see stronger legislation to make larger firms pay their small suppliers on time. Second, we need to encourage small businesses to adopt the technology that will help them get paid faster.
What’s the issue?
Our new analysis shows that UK small businesses are owed £24,841 on average as a result of late payments.
That’s almost the yearly salary of an employee in the UK.
The analysis is from Xero’s Small Business Insights, our scorecard on the health of the small business economy.
In the days when invoices were run on paper and had to be passed between different departments, there might have been an excuse for this. But not anymore.
What’s the impact?
Late payments cause a cash-flow squeeze which contributes to some 50,000 small business failures each year.
They also affect the financial profile of small businesses that carry on trading. A late payment debt can harm a firm’s credit score, making it harder for that small business to raise funds.
Many small firms find accessing finance hard enough already without late payment issues making it worse.
These issues go right to the heart of the productivity debate in the UK today.
Improving national productivity means helping companies to get access to finance and addressing late payments which tie up working capital and stifle innovation.
So, what’s the solution?
In the ten years since the Prompt Payment Code was introduced, we have seen little improvement in this area.
We are also yet to see whether the Payment Practices and Performances Reporting requirements and office of the Small Business Commissioner will tackle the crisis.
Now the government has launched a call for evidence, looking at how company boards can create responsible payment practices throughout their supply chain.
The call for evidence will also consider how to best promote innovative technology, such as accounting software, to help small firms manage their payment process.
As the UK’s most widely used online platform for small businesses, we will be taking part in this call for evidence.
We will also use this as an opportunity to restate our belief that the time has come for large firms to be obligated to pay their small business suppliers on time.
How can small firms help themselves?
Alongside our call for stronger legislation, we are also taking our own steps to help our customers tackle the late payment culture.
For instance, Xero integrates seamlessly with GoCardless – a company that enables small businesses to automate their payment collection through direct debit.
Our experience of working with GoCardless in the UK over the last 18 months shows that the technology helps small businesses improve cash flow and reduce the administrative burden.
Indeed some 80% of our UK small business customers surveyed have seen a reduction in late payment times and improvements in cash flow.
With the right legislation and the right technology, we can tackle the late payment crisis in the UK today.
In creating a more responsible payment culture, we can help small businesses to reach their full productive potential.
Want to find out more about Xero Small Business Insights UK. Check it out here.