Late payments: The biggest cause of business failure?

All they want to do is get paid for the work that they’ve done . . . but that’s proving easier said than done right now for small businesses which are the lifeblood of the Shropshire economy.
A new study by the Federation of Small Businesses reveals that poor payment practices are currently threatening the viability of more than 36,000 small firms in the region.
The ‘FSB West Midlands Small Business Index’ is a quarterly analysis of small businesses confidence, based upon their recent performance, current trading conditions and future aspirations.
This latest report, covering the fourth quarter of 2021, finds that late payments are blighting nearly one in 10 small businesses in Shropshire and neighbouring counties. Research from other sources, however, suggests that figure is probably even higher.

The FSB report reveals:

Confidence among small businesses has fallen significantly for the third successive quarter
More small firms reported a decrease in gross profit margins (45%) than those who saw an increase (34%)
More expect margins to be squeezed further than those who expect them to improve
More than half said that they had increased average salaries over the period and almost three quarters anticipate that their average salaries will rise further over the next 12 months.

In terms of the main barriers to small business growth in the future, the survey reveals that 74% cite the poor domestic economic conditions, 39% point to low consumer demand and 24% blame the lack of availability of skilled labour.
Telford businesswoman Hollie Whittles, chair of FSB West Midlands and director of two small businesses, says: “These latest findings demonstrate that confidence in the region is falling and fragile, with trading conditions remaining extremely challenging while costs and inflation are soaring.
“The Government’s planned hikes in National Insurance in April look even more misjudged in light of this new evidence.
“I believe that 2022 can and will be a better year for our small businesses, provided they get the breathing space and support they need to recover.”
She adds: “Other report findings support my view. For example, employment remained stable during quarter four and that more than half of the region’s small firms expect to grow in the next 12 months.
“These achievements and ambitions need to be nurtured by policymakers, not snuffed out.
“That’s why FSB is calling for the planned rise in NI to be scrapped, or at least to be offset by an increase in the Employment Allowance from £4,000 to £5,000; for an increase in the small business rates relief ceiling to £25,000, which would take 200,000 more firms out of this regressive tax; and for every big business and government organisation to abide by the prompt payment code.”

Hollie Whittles FSB West Midlands Chair

Banking giant Barclays has also been shining a light on the pate payment situation, saying that it believes more than two thirds of SMEs across the Midlands are currently waiting on late payments from customers.
For medium sized enterprises with 50 to 249 staff, the number wrestling with overdue bills rises to over 90%, it says.
And it can often be, quite literally, a life-or-death situation for some small businesses – particularly given what they have been through over the past couple of years.
The disruption to cashflow can might prevent new hiring opportunities or investment back into the business. In worst case scenarios, the business might be forced to close.
The issue of customers and clients paying invoices late is no new challenge for businesses, but two in five SMEs say that they’re more likely to experience late payments as a result of the pandemic.
For those that have been on the receiving end of poor payment practice, the majority said they would refuse a job with a potential customer if they were known for paying late.
The Barclays research shows that paying late is not only putting off suppliers, but may also deter prospective customers from spending with known offenders.
More than half of those surveyed said they would boycott a business – big or small – if they knew they regularly paid their suppliers late.
Why? Because the late payers often overlook the stress caused to small business owners by waiting on late payments.
Many owners say their mental wellbeing has suffered as a result of late payments, giving them sleepless nights.
A quarter of business owners say they haven’t been able to go on holiday over the past couple of years because of money owed to their business, according to the Barclays survey, and a higher proportion say their personal relationships with partners, family and friends worsen if they’re paid late.

Hannah Bernard, head of business banking at Barclays, says: “Late payments is the single biggest cause of business failure.
“We want to unite the small business community in tackling this issue and raise the social conscience of larger businesses who don’t pay on time.
“Any business worried about the impact of late payments should contact their bank to talk about their options, whether that be for guidance on how to report a business for paying late, or to explore invoice finance and insurance options.
“Having a constant cycle of late payments will hamper the future growth of the economy, and fuel a never-ending cycle of uncertainty for hard working entrepreneurs. Business owners across the UK have a lot of challenges to juggle right now, and the stress of chasing late payments shouldn’t be one of them.”
Small business commissioner Liz Barclay says she welcomes the bank’s commitment to making bigger firms face up to the consequences of paying their small suppliers late.
“The consequences for wellbeing and mental health can be catastrophic. But late payments are just part of the problem. Repeated delays and excuses, and extended payment terms of 90/120 and even 360 days are common.
“Uncertainty kills small and micro businesses as well as freelancers and sole traders. As well as customers and would-be employees we need to see potential investors refusing to invest in firms that don’t treat small suppliers well.
“We also need this to be top of the Board governance agendas. A change in payment culture is decades overdue.”
Through the Prompt Payment Code, businesses are able to claim late payment interest and compensation to businesses signed up to the code if they miss a payment deadline.
However, whilst most are fully aware that they can take action, the majority do nothing – out of fear that this would result in them going on a ‘troublemaker’ blacklist, and getting no further work from the customer.