By Marcus Leach

With corporate insolvency on the rise and a double-dip recession still a distinct possibility, new research commissioned by Hilton-Baird Collection Services shows that small businesses (SMEs) are falling victim to a punishing rise in late payment, which is stretching their cash flow to the limits.

According to the survey, two-thirds of business owners and finance directors have witnessed an increase in the time it takes customers to pay their invoices over the six months to July (67%), while only 5% have seen the situation improve.

Meanwhile, UK businesses have reported that they are now waiting an average of 22 days beyond agreed credit terms to be paid by their customers.

The payment gap is widest for small businesses with a turnover of less than £500,000 - those who can least afford it. Despite extending the lowest credit terms - typically 28 days compared to 33 days among companies with turnover of more than £3m - customers took on average of 51 days to pay.

This gives SMEs a typical payment gap of 24 days, more than six days longer than their larger counterparts and creating major cash flow problems during already difficult trading conditions.

More than two in five of those questioned claimed that privately owned / limited businesses were the prime culprits for late payment (43%), with anecdotal evidence that larger companies take advantage of smaller firms by enforcing their own payment terms and insisting that they override the SMEs’ terms and conditions.

Late payment on this scale is simply not sustainable and can send damaging shock waves along the supply chain. Significantly, the most common excuse for late payment was that customers are ‘waiting to be paid by their own customers’, as reported by 33%. This cycle is hard to break and can have detrimental effects on businesses whose cash reserves may not be sufficient to withstand the strains of late payment which, as a worst case scenario, can even trigger business failure.

“There is no doubt that the current economic climate is tough and businesses of all sizes are feeling the pinch. Our research proves what a major issue late payment is for the nation's SMEs, with smaller businesses particularly likely to suffer bad debt. However, SMEs are not doing everything they can to help themselves in these turbulent times," Alex Hilton-Baird, Managing Director of Hilton-Baird Collection Services, said.

“Whilst implementing credit checks, suspending credit facilities and charging late payment interest were popular amongst respondents, our research has revealed that UK businesses appear apprehensive about using the specialist resource of a debt collection agency, with only 17% outsourcing all or part of their credit control during the first half of the year.”

Another impact of late payment is that 84% of businesses had to spend more time chasing their customers for payment over the same period. Naturally, this diverts valuable resource from the essential job of managing the business to chase payment and seek growth, as evidenced by more than one in ten even having to turn away new business (11%).

Worryingly, it looks as though this issue is not going to disappear fast, as nearly a quarter admitted that they did not expect to implement any further credit management strategies in the next six months (24%).

“Outsourcing can be extremely beneficial and an effective method of recovering debts. We would therefore encourage SMEs to consider all of their options to overcome late payment, and not be afraid to consider outsourcing - particularly given its proven benefits,” Hilton-Baird said.

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