Friday, 17 June 2016 14:43

The state of late payment in the UK

British businesses are facing a unique set of circumstances right now - the global economy is emerging from the deepest recession in living memory, domestic trade is uncertain with the EU Referendum looming, and there are issues of legislation from the National Living Wage to auto-enrolment pensions that are affecting company finances on a national scale too.

With all of this in mind, what are the implications for businesses of all sizes when it comes to getting paid for the work they do?

Here we round up some of the most recent statistics and analysis to provide a snapshot of late payment in the UK in June 2016, and some of the main issues shaping the economy for the second half of the year to come.

Late payment in numbers

Figures cited in May by the Federation of Small Businesses put the total amount owed to small businesses in the UK at £26.8 billion, based on a report from BACS last year. Despite the generally improving economy, it is clear that many companies experienced cash flow problems in 2015 due to their trade credit - which includes late payment and losses due to company insolvency.

The Association of British Insurers published figures showing small businesses made 40% of the 11,000 trade credit insurance claims lodged in 2015, accounting for 25% of the total value of claims paid. Across all business sizes, £150 million was paid out, a massive 41% rise compared with the previous year - and it seems sole traders are suffering too.

Financial technology startup Ormsby Street found the average freelancer in the UK is owed over £5,000 at any one time, and invoices are paid on average 18.5 days after the stated deadline. Nearly half of UK freelancers worry about just having enough money to survive, while half have considered quitting freelancing specifically because of late payment.

Meanwhile, figures from R3, the Association of Business Recovery Professionals, show 18% of UK businesses are showing one or more signs of distress. Notably, 5% regularly hit their overdraft limit, while 7% report decreased profits and 8% have seen sales volumes drop - all of which could lead them to miss making a payment on time.

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Late payment in words

The biggest headline topic for the UK economy in the first half of 2016 has clearly been the EU Referendum, or 'Brexit' as it is commonly called in the tabloids. R3 stressed, however, that the international implications of Britain leaving the EU are just one of many issues affecting small firms at the moment.

President Andrew Tate said: "It's important to remember that businesses face a plethora of other incoming regulatory and compliance challenges. Just as many businesses - especially smaller ones - are worried about auto-enrolment pensions as are worried about Brexit."

Whereas Brexit may not happen at all if the Remain vote wins on June 23rd, impacts like auto-enrolment and the National Living Wage are unavoidable, and are of more concern to smaller businesses.

R3 found 30% of businesses with 2-5 employees are worried about the National Living Wage, which effectively represents a substantial rise in the minimum wage they must pay employees - putting small firms' cash flow under renewed pressure and risking shocks throughout supply chains.

As the Enterprise Bill received Royal Assent at the beginning of May, the FSB called on the government to give genuine powers to the Small Business Commissioner role.

National chairman Mike Cherry advocated "clarity around formalising the Commissioner's relationship with the Prompt Payment Code and the powers the office has to publicly name and shame those companies that don't comply" in order to tackle the £26.8 billion owed to small firms.

But it might not be a case of wilful non-compliance, particularly among small businesses and sole traders, who may simply not have the experience needed to manage their accounts effectively.

The Association of Chartered Certified Accountants has warned of this skills gap, and head of SME policy Rosana Mirkovich said: "Having the right financial capabilities remains vital throughout the life of a business, whether you are just starting out, have an established business or are looking towards a final exit from a firm."

And finally, with the British summertime pouring down around us nationwide, it's worth remembering one final piece of advice from the payment processors at BACS. Over Easter and during the bank holiday weekends of May, they reminded firms to schedule payments a day in advance to avoid missing invoice deadlines during the banks' hiatus. Aside from Christmas and New Year, British bank holidays tend to cluster around the spring-summer season, with more to come in August.

It's a minor inconvenience that shouldn't normally have a major impact on cash flow and late payment - but with Brexit, auto-enrolment and the National Living Wage all creating a major distraction for businesses of all sizes, it's easy to see how more invoice deadlines might be missed in the months to come.

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