COVID Triggers 20% Spike in Overdue Payments Owed to SMEs

As the financial fallout of the COVID-19 pandemic continues to sweep through the economy, latest figures show that SMEs have been hit by a 20% surge in late payments over the past 12 months.

According to research from cloud-based credit management platform Know-It, the total value of overdue invoices UK-based small businesses are now waiting on has leapt to £61 billion, a sharp rise from the no less eye watering figure of £50bn reported in 2020.

This is a nightmare scenario for tens of thousands of cash-strapped business owners who have seen their turnover severely squeezed by the pandemic. Not only are their revenues down, but they are finding it harder than ever to recover monies owed for goods and services delivered - funds they are likely to have budgeted for to cover their own liabilities.

Once again, we are seeing how the much-vaunted ‘trickle down effect’ seems to work in negative through the British economy. Rather than enjoying the fruits of wealth and jobs flowing down from the top, the smallest suppliers, contractors and service providers are more likely to shoulder the burden of economic disruption. 

Cash flow crisis

The worrying spike in late payments is no doubt the result of cash flow issues being passed down the supply chain until there is no one else to pass them on to. As a result, two thirds of SMEs operating in B2B markets - roughly four million businesses - regularly don’t get paid on time and, furthermore, have to waste time and resources chasing what they are owed.

This is the legacy of the UK’s long-standing permissive culture around late payments, where big businesses in particular have been allowed to flout contractual obligations with impunity. Successive governments, including the current one, have talked endlessly about getting tough on late payments without taking any meaningful action.

The end result is what we see today - a £60bn hole in small business accounts at a time when, to use the Chancellor’s words at the last budget, the country is facing the biggest economic shock in 300 years. It’s a totally avoidable situation that could have catastrophic consequences for the whole economy.

Let’s not forget that, collectively, SMEs account for three fifths of total employment in the UK and just over half of total turnover (£2.3 trillion). The cash flow crisis caused by unpaid invoices is estimated to push upwards of 50,000 SMEs out of business every year, while a third of small businesses report that late payments have been a contributing factor in them having to make redundancies.

Late payment culture undermines the foundations on which the UK economy is built, and still we’re going in the wrong direction. For all the mileage the government has sought to get out of its pandemic support schemes for businesses, one thing it has conspicuously failed to get to grips with is protecting SMEs from the pernicious trickle down effects of unpaid invoices. Action simply must be taken, if it is not already too late.

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