Late Payments Still Major Concern for UK SMEs

Research by Bacs Payment Schemes Limited (Bacs), the organisation behind Direct Debit and Bacs Direct Credit, has revealed that British SMEs are having to wait an average of 41 days longer than their original agreed payment terms, before invoices are paid.

This is an increase of 9.5 days on the time SMEs were waiting, beyond agreed deadlines, in June of 2009 (31.5 days), and is contributing to considerable cash flow issues for many British SMEs.

Michael Chambers, managing director of Bacs, said:

Small businesses rely on receiving payments on time so that they can maintain cash flow and ensure the business can run on a day-to-day basis.Our research highlights the continued widespread nature and real impact of the late payment problem, which was affecting 961,000 SMEs in December last year – that’s a massive 57% of all British SMEs.”

Bacs’ research shows that large companies are the main late payments culprits, with 37% of SMEs citing them as the worst offenders. However 17% of respondents pointed the finger at sole traders, with the same number (17%) blaming fellow SMEs. 6% of SMEs cited not-for-profit organisations and government as the worst payers, suggesting that the pledge made in the 2010 Budget, that government departments will pay 80% of invoices within five days rather than the usual 30, will be a challenge to meet.

Cash flow remains the most common reason for overdue payments, with 39% of respondents saying it was the main reason given by customers for paying late (an increase of 9% from June 2009). 7% of respondents said their customers blamed the economic downturn for payments being late (up 5% on June 2009) and a further 7% said that being paid late had a knock on affect on their ability to make their own payments. 7% of respondents were told by customers that they had simply forgotten about the invoice, while 4% were given the reason that ‘the cheque is in the post’, an excuse soon to be obsolete with the UK Payments Council’s plans to phase out cheques by 2018.

Chambers said:

“SMEs need to be proactive in improving their payment collection processes. Accurate, efficient and prompt invoicing, which clearly states the agreed payment terms, is a must. 86% of SMEs receive cheques as payment and 84% of SMEs make payments by cheque, and with cheques soon to be a thing of the past, businesses should be encouraging payment direct into bank accounts, using payment mechanisms such as Bacs Direct Credit.”

Although a huge number of SMEs are experiencing late payment of invoices, Bacs’ research reveals some encouraging signs of change, with the total amount owed in late payments to British SMEs decreasing from £30.4 billion in June 2009 to £24 billion in December 2009. The average amount owed at any one time to an SME also fell from £28,000 in June 2009 to £25,000 in December 2009. The current figures still however represent a rise of £6.2 billion in the total amount owing since 2007.

Phil McCabe, spokesperson for the Forum of Private Business (FPB), said:

“Late payment is a huge problem for small businesses and it’s highly disappointing to hear that small firms are having to wait even longer to be paid.

“Late payment is frequently cited as the number one problem facing our members, eclipsing even taxation and regulation. With its damaging impact on a company’s cashflow, it can cause a perfectly viable and successful firm to fold.”

McCabe added:

“We welcome Bacs’ work to highlight this problem and hope it will increase the pressure on late payers to change their ways.”

Bacs’ research shows that regionally SMEs in the South are faring worse than their Midlands and Northern counterparts. 63% of SMEs in the South cited having experienced late payments at one time or another compared to 53% of SMEs in the Midlands and 51% in the North. In addition, average payment deadline extensions are particularly pronounced in the South at 43.7 days (an increase of 9.1 days from June 2009) and the Midlands at 42.5 days (an increase of 18 days from June 2009).

Sectors that have been hit hard by late payment problems are the service sector, with 59% of SMEs experiencing late payments, manufacturing with 56% and distribution with 53% of SMEs reporting issues. Service organisations extended their payment deadlines by an average of 50.2 days in December 2009 in order to receive payment, compared to 34.6 days in June of the same year.

Key late payment statistics, December 2009:

  • 41 days – the average time beyond the agreed payment date that GB SMEs have to wait until they are paid, up almost 10 days on June 2009
  • 961,000 – the number of GB SMEs impacted by late payments in December 2009
  • £24 billion – the total amount owing to GB SMEs at any one time in late payments, down more than £6 billion on June 2009
  • £25,000 – the average amount each GB SME is owed in late payments at any one time, down from £28,000 in June 2009 £10,000 less than in 2008
  • 39% – stated cash flow as the main reason given for late payment
  • 37% – of SMEs stated larger companies are the biggest culprits of late payments owed to them
  • 17% of SMEs surveyed cited SME and sole traders as being the worst late payment offenders
  • 6% – of respondents cited the government and not-for-profit organisations as responsible for late payments
  • 84% – of respondents still use cheques to pay other organisations, despite more cost and time efficient options like Bacs Direct Credit
  • 57% – the number of GB SMEs that have experienced an issue with late payments, down from 66% in June 2009 but up from the 54% recorded in 2008

For more information about late payments and how to tackle them head on, visit where Bacs has developed a series of hints and tips for encouraging prompt payment.

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