How big is the late payments crisis and who will break the deadlock?

Rising costs make consistent cashflow crucial, yet late payments remain a killer for businesses operating on tight margins. Adflex CEO, Pat Bermingham, explores the scale of the problem and explains why the days of late payments may finally be numbered.

It would be an understatement to say that late payments are hugely frustrating for businesses. For large international companies, chasing up multiple suppliers, managing accounts, and even writing off bad debts, can be a significant investment year-on-year, cutting profits and the ability to reinvest and grow. Late payments also drain their productivity, reportedly wasting 56.4 million hours of business time each year in the UK.

For small and medium sized businesses operating at the other end of the scale, late payments could mean your business doesn’t have the funds to acquire stock, meet partners or even just pay the bills, leading to further charges and even insolvency. Sadly, this is an all-too-common reality: the Federation of Small Businesses (FSB) finds that around 50,000 small businesses close every year due to late payments.

Current economic conditions are undoubtedly putting additional pressure on suppliers waiting to receive payments. Tightening margins for buyers will only add to a reluctance to pay before they absolutely need to – another potential hit for suppliers.

So, suppliers can’t wait any longer to be paid, and buyers are struggling to pay faster: how can we break the deadlock and solve the late payments crisis once and for all? The answer lies with multiple parties, from governments to small businesses.

Can governments step in to solve late payments?

While there are no mandatory government regulations on late payments at present, we have seen the implementation of the Prompt Payment Code (PPC), which is a voluntary code of practice for businesses that agree to pay suppliers on time within agreed terms. This was strengthened in 2021, so those adhering to the PPC must pay 95% of invoices from small businesses within 30 days. However, the PPC still needs more exposure to have a bigger impact, which will require the support of large buying organisations, banks, and payment processors.

Governments could also incentivise B2B players to pay promptly by offering buyers with a track record of paying on time priority access to public sector contracts. The risk of this approach is that it could favour big businesses with cash reserves that make it easier to pay quickly. However, with the rise of digital payment options like commercial cards, even SMEs can access funds, so businesses of all sizes should be able to take advantage of fair payment in fair timeframes.

After all, when big businesses have poor financial practices, it can cause the collapse of entire value chains, where no one wins. Arguably the most famous example of this was with outsourcing giant, Carillion, which was reportedly engaged in off balance sheet financing when it collapsed in 2018, affecting over 75,000 people in its supply chain and putting over 450 public sector contracts at risk. The UK Government has since found itself under pressure to review its contractors and its regulations for accounting and financing methods. More transparent funding methods, like commercial cards, may have helped mitigate this impact.

A collective problem, with a collective solution

Late payments often cause the breakdown of a relationship between two businesses. Yet, it is these relationships that hold the key to overcoming the issue. Buyers and suppliers must work together to communicate and deliver the benefits of faster reconciliation to their organisations. Some suppliers are already doing this by offering a discount to customers who pay early; others accept commercial cards and don't pass the merchant service charge costs on to the buyer, in good faith that this encourages speedy settlement.

This choice is important in helping solve the late payment challenge. One technology that facilitates faster commercial card payments whilst delivering value to both sides of the transaction is straight-through processing (STP). What’s unique about STP is that it is a buyer-initiated payment method, removing the burden from the supplier altogether to reduce the cost of acceptance. It can also be used to automate transactions to remove further friction from the process for buyers, and speed up settlement.

Suppliers benefit when it’s as easy as possible for buyers to pay by their preferred method, providing trust and removing friction from a process that could otherwise delay or deter payments. Businesses are commonly looking to procure-to-pay  platforms to consolidate incoming and outgoing payment processes into one place. Preferred payment technologies, such as STP, can be directly integrated within the platform so a business can be flexible in how it makes and accepts payments.

Offsetting the cost of interchange with access to credit

Commercial cards are not new, but they are increasingly sought by businesses. They can enable a buyer to access an up-front line of credit to extend days payable outstanding (DPO), providing all parties with access to financial resources so no one is out of pocket. The alternative is still far too prevalent: buyers delay payment and effectively using suppliers as a line of credit. The result? Potentially irreparable damage to vital long-term business relationships.

Some suppliers can be reluctant to use commercial cards due to the 2% service charge typically incurred on each payment. However, for those struggling with late payments and cashflow, commercial cards enabling payment at the point of invoice or sale, rather than the 30+ days it can take to settle a BACS payment, so in the long-run, 2% is a small price to pay in exchange for prompt, reliable cashflow.

It's worth noting that suppliers can help mitigate the impact of some charges, such as merchant service charges, by leveraging flexible or dynamic interchange. Many businesses work closely with processing partners to access such benefits, identifying customers that should be paying by card and growing card sales to get paid promptly.

The bright side of prompt payments

Overcoming the late payments problem isn’t going to happen overnight, and for businesses operating in different ways, and in different sectors, the solution won’t always be the same. But communication is always the best first step; find out how your buyer prefers to pay and understand why invoices are paid late to get a better picture of how to facilitate faster settlement.

Once this dialogue begins, we can stop looking at late payments as a problem, and instead focus on the benefits of prompt payments, bringing economic growth that benefits all parties. It means better business relationships and improved access to working capital through commercial cards. Prompt payments can also enable new hiring and investment opportunities, so suppliers can offer better services and more value to buyers. It's important that both parties in a transaction recognise the mutual benefits of a stronger, trusted prompt payment process. After all, when everyone pays promptly, no one pays the penalty.