Running a small business is hard enough at the best of times - but made doubly so if customers don't pay on time.
Making the news this week, the government minister responsible for small firms says 30 days should become the national norm. The issue is currently under the spotlight following the debacle surrounding the collapse of Carillion plc earlier this year, where it was revealed that the contractor was taking up to four months to pay its suppliers!
In an interview on Wednesday this week, the Small Business Minister, Andrew Griffiths said the government must “make it unacceptable for big business to finance their cash flow from small business.” They should fall in line with what the state does, which is pay suppliers within an “ethical” 30 days he said.
“Small businesses, if that money was in their bank account, they’d be investing it, they’d be growing their businesses, they’d be taking on new technology,” Andrew Griffiths was quoted. Apparently a consultation on the issue is “imminent.”
Reading around on the subject, a recent survey conducted by Dun & Bradstreet and the Small Business Research Centre uncovered pretty shocking statistics on how late payments are impacting UK SMEs. Of the 500 managers and small business owners that the survey spoke to, 58% said late payments are putting their companies at risk of outright failure.
According to this survey, SME respondents were owed an average of £64,000 in late payments, with 11% owed between £100,000 and £250,000 in unpaid receipts at any given time - which are quite mind-boggling figures.
Small businesses are particularly vulnerable to cash flow concerns, with 26% citing timely payments as the most important factor to the financial success of their companies. This is understandable, as it can be challenging for SMEs to secure short-term loans from banks and other traditional lending institutions.
One particularly disturbing statistic which stood out to me from this survey is that 15% of small business owners admitted to dipping into their personal savings to cover gaps due to late payments from customers. Whilst it's understandable why some would feel the need to go to these lengths to protect their company, it's surely only ever going to be a short-term solution and once which certainly isn't sustainable over any length of time.
What then, can small businesses do to protect themselves against the dangers inherent in late payments?
Ed Thorne, the UKI Managing Director of Dun & Bradstreet who conducted this recent survey says there are several courses of action a SME can take to mitigate themselves against the risks. "First," he says, "businesses should undertake due diligence when onboarding any new customers." He explains, "Even if a business is hard-pressed to turn down new clients, the insights that come from company credit reports can help keep the number of high- and low-risk customers in balance."
It is also suggested that small business owners can explore alternative lending arrangements with financial institutions. "As the issue of late payments gains urgency, more lenders are willing to extend limited funds to compensate for delays," Ed Thorne said. "Single-invoice financing can also provide a back-up option to aid cash flow."
Finally, it is advised that SMEs should actively monitor the financial health of their existing customers. Understandably where credit checks take place, it is normally only for new customers. The real risk it seems though, is when goods and services are provided on credit terms to customers already known to a small business. Business credit scores, ratings and payment behaviour are always of course liable to change. "Tracking the ongoing performance of existing customers, and acting when this behaviour changes therefore, can be the difference between being paid first and paid last – and make a real difference to a business’ financial health," warns Ed Thorne.
Is this problem of late payments something which you recognise within your business? Has it led to difficulties within the dealership? If so, what steps have you taken to combat the problem?
Please feel free to leave a comment below to share your experiences with our community of dealer readers. It would be interesting to hear what the independent dealer network’s take is on this subject.
We will look to publish a selection of your comments in a future issue of Service Dealer.
