Sole Trader had £180,000 of debt hanging over him – Lines Henry finds the right solution John had to stop...
It’s well known that cash is the lifeblood of any business and maintaining a business cashflow is often the difference between continued survival, or insolvency and liquidation for companies of any size. In recent years, it seems that the news is filled with stories of how large chains and well known names both on and off the High Street have been forced to take extreme action in order to survive and not all of them have succeeded. While each business failure, for whatever reason is a tragedy for those involved in them, the small and medium sized businesses, whose affairs aren’t usually newsworthy and as such unreported, are just as susceptible to difficult trading conditions and have neither the resources nor the clout that larger chains can lean on in order to help them survive.
Late Payments Stifle Growth and Cause SME Insolvency
One of the most odious tactics larger businesses use to maintain their own cashflow and boost their own chances of survival, is the practice of using their size and power to pay their B2B invoices well past the due date. They’re able to get away with it because the businesses to whom they’re in debt, are too small to have the resources to enforce payment and in any event are unwilling to do so because they fear getting no future business from their delinquent debtor.
This means that the smaller businesses, which have fewer resources and fewer options, are having to figure out a way to survive until their larger clients choose to pay them. of course, not all find a way to do so and many have succumbed to insolvency and liquidation because of this late payment culture.
The Scale of The Problem With late Payments
As disastrous of as the collapse of Carillion was early last year, it did particularly highlight the issue of late payments and especially the widespread abuse of power by larger companies over their small suppliers.
Carillion was reputed to force the business to which it awarded contracts, payment terms in excess of 90 days so such small businesses had to choose between waiting for over three months to get paid, or getting no work from one of the most dominant players in the outsourcing market. When Carillion collapsed, such smaller businesses came off particularly badly as it became clear that they would never be paid for months of work they’d already done. Unsurprisingly, many have followed Carillion into closure and as SME’s also do business with one another, late payments from larger business have a domino effect as those they deal with are also unable to pay their contemporaries on time, as well as leaving them struggling to pay their other overheads and employees too.
The large and high profile businesses we often hear about are vastly outnumbered by SME’s, in fact around 99% of businesses in the UK are classed as small to medium enterprises and published research suggests that between them, they face an annual bill of £6.7 Billion, or an average little over £6,000 each in late payments, which for many small companies is a ruinous amount to be owed. If fact, around 50,000 small businesses a year have their closure attributed to late payments and is a large driver of the 20% increase in business insolvencies over the last few years.
What’s being done about late payments?
Late last year, proposals were put in place to force medium and large businesses to sign up to the ‘prompt payment code’ which is currently a voluntary agreement. This code is a commitment to pay 95% of invoices within 30 days. The proposals tabled last year included making this code mandatory for all but small businesses and the idea was also put forward to refuse to award government contracts to those firms which could not demonstrate that they paid their invoices within 60 days. Late payments were also mentioned in this year’s Spring statement with a renewed intention to deal with the practice, but until words become action and these ideas are ratified and enforced, it seems little will change.
With cashflow being at the heart of the issue of late payments, it can be useful to know that help is available for business whose cash is tied up in their Debtor’s ledger, leaving them unable to pay their own debts when they fall due. There are a number of strategies to boost cashflow, tighten up credit management practices and secure short or long term funding which might be suitable as well as a range of other insolvency options. At Lines Henry, we offer a free consultation, so if your small or medium sized business is under pressure due to late payments from your clients, contact us to arrange this and find out how we can help.