Continuing the pay late culture risks supply chain catastrophe, says Juno

By Pete Bailey, co-founder and chief product officer at digital payment platform Juno

Bailey: solving the small business late payment crisis is vital

Being paid promptly for the services or products you provide as a retail business is a basic principle of good business. At least it should be! Sadly it happens rarely. Late payments have become so commonplace that it’s standard practice for some big firms never to pay on time.

In fact nearly half of small retailers and brands operating in the retail sector are paid late regularly by their suppliers, according to a YouGov survey we commissioned earlier this year among 500 small business decision makers across the UK. This however masks the true extent to how long smaller suppliers are waiting for their cash. With many subject to longer payment terms in supplier contracts of 60 or 90 days, ‘paid late’ often means many months have passed since the goods were delivered and the invoice submitted. 

This creates cashflow issues for businesses that still have to pay for the cost of goods, other business expenses and salaries. 

During the pandemic, figures released by Pay.UK, which runs the Bacs Direct Credit and Direct Debit payment services, showed that UK SME late payment debt has risen to £23.4 billion, up £10.4 billion since 2018. 

Getting the money in can be a full time job. Most businesses resort to chasing accounts departments payment as their first port of call and can be reluctant to elevate the issue to their client contacts for fear of souring the relationship. This is a manual and time intensive job that involves checking the bank account, getting hold of the right person in accounts, often resending the invoice, checking for payment again and chasing accounts again. The immense amount of time spent, often as much as a day a week, takes business owners and managers away from their next order and can impact their ability to succeed and grow. 

Other options pursued, such as factoring or borrowing capital against unpaid invoices, carry a percentage of interest against the total invoice amount. In retail there may not be the margin to consider this additional cost. 

Some businesses arrange expensive and difficult to access bank loans or overdrafts and others are simply left unable to pay salaries or forced to consider making redundancies. Indeed in a second survey we carried out this month amongst small business owners, 14 percent working in the retail sector said they were on the brink of bankruptcy or business closure and the same number were thinking of making or had made redundancies as a result of cashflow issues caused by late payments. 

The Federation of Small Businesses estimates that 50,000 businesses already close every year due to late payments, and the pandemic is thought to have exacerbated the issue.

Mental health is impacted too.  Our survey showed that nearly three quarters of small businesses owners in the retail sector are suffering from stress, anxiety and/or depression as a result of cash flow issues caused by late payments. 

Solving the small business late payment crisis is vital since SMEs live or die on their cash flow. 

Any company that subjects suppliers to unfair payment terms or pays late is not acting ethically and responsibly. Although as many as 3000 companies have signed up to the Prompt Payment Code which requires them to pay within 30 days of invoice, this still fails to recognise unfair terms that still means suppliers are waiting months for payment. As yet this is not part of any corporate governance requirements.  

Supply chain catastrophe

If risk to reputation doesn’t sway big retailers to pay fairer and faster, then perhaps the risk to their business will. If too many small businesses fail in the next year because they are not getting their money into the bank quickly enough, entire supply chains could be compromised. In grocery retail for example, which is already feeling the full force of lorry driver shortages, Brexit delays and future food shortages as a result of the unavailability of CO2, this could be the final straw in a perfect storm that means empty shelves in the supermarkets. 

Address the fundamental frictions of payment flow

There is no silver bullet to solving cashflow issues. As a first step, smaller suppliers should aim to negotiate better payment terms, but this is not always possible and not many businesses are prepared to walk away from a contract because of the terms of payment.  Secondly, make the impact of late payments on your business real.  If bigger customers truly realised the full impact of their actions on your ability to pay staff and make products, this might move the needle somewhat. 

Certainly we’d like to see failure to support small businesses with prompter payments being more closely recognised for the impact it can have on a company’s reputation and perhaps becoming one of the essential markers of corporate governance.  

Thirdly, we know that lack of automated processes are time consuming and therefore likely to lengthen the payment period.  Working on fairer terms without addressing the payment request and process flow fails to acknowledge the fundamental frictions that exist when businesses just want to get the money they are owed in good time. 

The reality is that nearly half of small businesses (37% of small businesses working in retail) create invoices manually, which is  time intensive for small businesses and slows down payment flow. Adding simple digitisation to processes related to cashflow – such as an automated request to pay with a QR code or an automatic alert of where an invoice is in the customer process – makes it easier for small suppliers to stay in the black.  The easier it is to make a payment the faster that payment is likely to be. 

However you look at it, being paid late costs small businesses dearly. With so many  struggling after the pandemic, this must change. Every business needs to play their part in creating a culture and a system of prompt payment.