By Daniel Hunter
UK policymakers need to rip up the rulebook and start again when it comes to how they manage and regulate late payment, says ACCA (the Association of Chartered Certified Accountants).
In a report by ACCA, it says that the key to ending late payment is to build a financial infrastructure that boosts trade credit — especially for small and medium-sized enterprises (SMEs).
Andrew Leck, ACCA spokesperson on late payments said: “Late payment is life-threatening for many organisations in the UK, and its impact on the smallest businesses is most acute. Those with fewer than 50 employees are typically twice as likely as large corporates to report problems with late payment.
“The fact is, with the right intervention, late payment doesn’t have to be a fact of life for businesses. At its most basic form, late payment is a form of credit and in an ideal world, where all solvent businesses would have prompt, uninterrupted access to finance from diverse sources, late payment would be very rare. With a new Government in place, we now have the perfect opportunity to stamp out our culture of late payment by taking a fresh look at the causes.”
As the Secretary of State for Business, ACCA says Sajid Javid has the opportunity to make trade credit regulation more effective and simultaneously end the scourge of late payment currently afflicting our economy.
Mr Leck said: “Despite its importance, ending late payment has proved to be an elusive goal for governments across the world. What the UK Government needs to recognise is that late payment is essentially a demand for credit and start tackling the problem as such.
“The efforts of our incoming Business Ministers need to be fully focused on building a financial infrastructure that boosts trade credit through support of alternative finance and the free availability of credit information.
“This approach has the potential to be far more effective than the measures currently proposed around improving the legal framework for late payment disputes and ensures that Government policy makes a positive difference far earlier.
“When late payment becomes a chronic problem, supply chains are beyond repair and customer relationships fail. Opening the doors to trade credit for the UK’s businesses is a solution that could put a stop to late payment before it has even started.”
The report, launched today, also looks at how suppliers can protect themselves through careful due diligence, and by understanding the administration of their operations. The Government announcement last year that banks must share information was an important step forward and SME’s should recognise the value of their data. It goes on to identify how buyers can safeguard their business reputation by signing up to the existing Prompt Payment Codes, and sticking to it.
The report offers nine conditions that need to be met if trade credit is to be sustainable:
- Buyers’ and suppliers’ standard terms of credit should be transparent.
- Cash flows to suppliers should be predictable through explicit credit policies and contract terms.
- Invoicing, collections, accounts payable and invoice dispute processes should be efficient and transparent, with senior staff taking responsibility.
- The status of invoices should be easily monitored throughout their lifetime.
- Suppliers should be aware of the cost of providing credit to customers.
- Differentiated pricing should reflect the suppliers’ cost of capital, so that neither they nor their prompt-paying customers are forced to subsidise late payers in the long term
- Customers and suppliers should give each other adequate notice before seeking new terms of credit, so that alternative financing can be sought in time.
- Suppliers should seek to understand, and customers should be honest about, the causes of late payment and the viability of late paying customers.
- Payment plans should be set out explicitly in contract terms and genuinely troubled customers should opt for these rather than resorting to late payment.