03/04/2012

By Edward Winterton, Executive Director At Bibby Financial Services

The financial stability of the UK’s small and medium-sized business community is being put at risk by corporates who are using their size to secure unworkable payment terms.

At Bibby Financial Services we have conducted research among 1,000 small and medium-sized businesses which found that 49 per cent of owners and managers feel they have had no choice but to extend payment terms to larger customers as they fear losing valuable contracts.

With UK insolvencies in Q4 2011 up by 7.2 per cent on the same period in 2010 and the economic outlook set to remain tough well in to the new financial year, getting paid on time in order to maintain a healthy cash flow is crucial for small and medium-sized businesses.

Recognising getting paid on time is one area of business they cannot afford to comprise on, the majority of owners and managers are taking steps to exercise sound credit management. The research found that 43 per cent are trying to enforce payment terms of 30 days, while 35 per cent aim to get monies due within 60 days of invoicing.

Despite the consequences of not getting paid within these terms - 53 per cent reported they simply cannot operate if they have to wait longer than 60 days for payment - the majority of SMEs remain at the mercy of larger organisations.

In fact, one in ten (9.2 per cent) small and medium sized-businesses have had such a bad experience with customer late payment that they have reluctantly taken their case to the small claims court. A further five per cent have had to simply write off and absorb debts due to the escalating cost and time involved in pursuing payment.

Rather than putting owners and managers in an impossible situation and using their size to their advantage, larger organisations should lead by example and exercise good corporate citizenship when it comes to working with small and medium sized businesses.

While the European Late Payment Directive coming in to force in Spring 2013 will go some way to improve the UK’s late payment culture, for smaller organisations, the challenges associated with waiting for payment remain.

Not only does it have a serious impact on cash flow, many owners and managers are spending more and more of their valuable time chasing overdue payment instead of focussing on sales and growth.

Despite 14 per cent of businesses spending the equivalent of an entire week’s working hours every month chasing late payments, 54 per cent of the owners and managers surveyed have no choice but to chase overdue invoices themselves. Encouragingly however, one in five (20%) businesses have found a workable solution and secured outside support from invoice finance organisations.

Working with an invoice finance company is an ideal option for businesses which need to improve cash flow and are struggling to collect customer late payment. As invoices are raised, the invoice financier releases a percentage of funds against these invoices and then collects the payment directly from the customer.

As a funding solution, invoice finance can help businesses of different sizes bridge the funding gap between raising an invoice and receiving customer payment. However, we would encourage these larger firms who find themselves increasingly extending payment terms to consider the effect they are having on the cash flow of smaller and medium-sized businesses, for which absorbing the cost of late payment is a much greater challenge.

Invoice finance is becoming increasingly popular with firms, like the 53 per cent of those in the research, who simply cannot wait to get paid but are perhaps not at the stage of investing in their own credit management.