There’s no getting around it; late payments are crippling for Small to Medium Enterprises (SMEs). Nearly a quarter of insolvencies are caused by late payments. In fact, if all payments were made on time there would be a £2.5 billion boost to the British economy, according to a 2016 report by the Federation of Self-Employed and Small Businesses (FSB).
Thankfully, there’s a chance that late payments might soon become a thing of the past. At the end of January, Labour peer Lord Mendelsohn introduced a Private Members Bill to the House of Lords that could make things harder for persistent late payers.
The bill would legislate a 30-day limit for all invoice payments, enforced by the Small Business Commissioner, who would have the ability to fine repeat offenders.
What’s more, the bill would also attempt to curb what are known as ‘predatory payment practices.’ This refers to practices that aim to squeeze suppliers by promising fast payment in exchange for a discount and imposing charges for onboarding or staying on supplier lists.
The bill is likely to be welcomed by many small businesses as it represents a strong-armed approach to a practice that regularly damages smaller firms.
The Association of Accounting Technicians (AAT), the world’s largest professional body for accountants, “very much welcomes the measures being proposed by Lord Mendelsohn and hopes other politicians, from all parties, back this important Private Members Bill.”
Previous attempts to crack down on late payments had an emphasis on voluntary measures rather than concrete punishments such as fines. Increasing the power of the Small Business Commissioner might just make frequent late payers take their invoices a bit more seriously.
One of the main problems with late payments is that they cause cashflow problems for companies, compromising the flexibility that is essential to thrive in the fast moving world of modern business.
Late payments also hamper businesses’ productivity. SMEs spend more than a working week chasing late payments – a total of 56.4 million lost hours a year, according to figures published by Intuit Quickbooks in November 2019. There comes a point where the time and money spent chasing down a payment can devalue the original work to the extent that it becomes questionable whether it was worth doing in the first place.
Research by Tide uncovered that the average late payment has risen to £8,500, an increase of over £2,000 on 2016 figures, suggesting that there is a growing culture of paying after the agreed date.
We’re curious to see whether Lord Mendelsohn’s Bill manages to change anything. Watch this space.