We all know just how detrimental late payments can be to any business. It can be hugely frustrating not to get money owed to you, but the potential damage goes much further than that.

The UK, happily, includes certain protections to ensure that companies are paid in good time. The Late Payment of Commercial Debts Regulations 2013 – an update on the Payments of Commercial Debts (Interest) Act 1998 – introduced new rules related to payment periods and the dates from which statutory interest runs on commercial debts.

Since then, there have been many government initiatives to tackle late payments. These range from the Prompt Payment Code, and it's updates in the Payment Practices and Performance Reporting regulations to the creating of the Small Business Comissioner. 

The problem hasn’t yet been solved. The issue remains a real problem for small businesses.

How – with laws to protect small businesses and ensure that they receive what they’re due – did this happen? It’s quite simple: there’s a lack of information available to small businesses about payment timeframes – and this allows the trend of transactional tardiness to continue.

At Xero, we’ve looked into the anonymised, aggregated data drawn from hundreds of thousands of our small business subscribers in the UK – to work out how long on average they waited to be paid. We wanted to know how small businesses cope in a culture where late or non-payment is almost expected. As a result, we have produced Small Business Insights.

Days to pay

The first step, to protect our clients’ privacy, was to anonymise and aggregate the details of 7.5 million invoices with 30-day payment terms issued through Xero during the past year. From there, we measured the time between when bills were issued, and when they were paid.

The yearly average of invoices paid late through Xero in 2017 was, at 52%, quite high. The worst months for late payments typically fall in the first quarter of the year. This is perhaps not surprising, given that January tends to be a budgeting month for all, following the frivolity of the festive period.

The indicator shows that over the past year 30-day invoices are on average paid after 40 days, nationwide. Yet further analysis of FTSE 350 companies show that on average they pay their invoices after 46 days, a full 6 days longer than smaller firms. 

Among the FTSE 350, we found that the slowest sectors to pay small businesses in the past year are food producers (averaging 60 days), construction and materials (averaging 57 days), and household goods (averaging 53 days). FTSE 350 companies in the pharmaceuticals and biotechnology sector were also revealed to pay the most inconsistently, with invoices being paid an average of 47 days in 2017, a low of 37 days in September 2017  and a high of 68 days in June.

“Late payments are something of an epidemic for small businesses, even with all the legal protections available”, says Stephen Paul, Partner at Valued Accountants. “What’s more, these delays are often fairly significant – especially at certain times of the year. This is an issue that’s clearly refusing to go away. Until it does, small businesses will continue to endure financial frustration.”

“It’s understandable that small businesses in the UK have come to see late payments as a scourge, especially at certain times of the year”, says Edward Berks - EMEA Director, Fintech & Ecosystem at Xero. “They have a highly detrimental effect on cash flow – and can even hamper the ability to pay suppliers and employees. In a very real sense, late payments result in late payments.”

What this means for small businesses, and the national economy

The phenomenon of late payments has a broader effect on UK small businesses. The most immediate of these is that it undermines a company’s ability to perform accurate financial forecasting, particularly where cash flow is concerned. The Office of National Statistics indicates that only 44.1% of UK small businesses survive their first five years of operation – with many going under because, among other things, they don’t understand their financial position until it’s far too late. Our 2017 Make or Break report shows that 50,000 small businesses fail each year due to cash flow issues: 60% blame poor access to capital.

“If clients don't pay on time, it gets harder to pay our employees and freelancers on time,” said Sabine Zetteler, founder of Zetteler Creative Publicity. “Just like people, businesses such as ours often live from payment to payment, and although we’ve never paid our team late, the stress of chasing invoices has an impact throughout the company.”

This is a problem with significant implications for the wider economy. According to The Federation of Small Businesses, a UK-based organisation representing small and medium-sized businesses, the combined annual turnover of SMEs sat at £1.9 trillion in 2017 – 51% of all private sector turnover in the UK. These businesses employ 16.1 million people: 60% of all private sector employment. When late payments become a regular occurrence, the future of these businesses and the livelihoods of their staff are placed at stake.  

“The impact of late payments on the economy cannot be exaggerated, said Vicky Pryce, economist and previous Director General for Economics at the Department for Business, Innovation and Skills. “Work done by the European Commission looking at both business to business and government to business payments found that late payments were directly associated with worsening firms’ cash flow positions, and particularly for smaller firms, left them with no option but to request extensions of overdraft facilities and increases in their financing costs and in bank borrowings. Late payments prevent the economy from reaching its productive potential.”

The scourge of late payments

It’s not all bad news. Late payments have long been recognised as an issue. Recently, the Chancellor of the Exchequer described them as a ‘scourge’ in the most recent Spring Statement and pledged to eliminate them. The Government also recently appointed the first Small Business Commissioner to help small firms resolve payment disputes.

We can’t attribute this to any one overarching reason, but as a cloud accounting company, we’ve seen first-hand that businesses which use online tools get paid 33% faster than those which use paper invoices. It’s often easier to get paid with the help of technology than more traditional means – and it involves less manpower as well.