12 October 2021

SMEs deserve better: Solving the scourge of late payments

By Liz Barclay & Clive Rich

With the worst of the pandemic behind us and the need for government support measures dwindling, small businesses should in theory be able to unshackle themselves from an extended period of restraint. Yet the unsung heroes of the UK economy are faced once more with an uneven playing field – one which is slanted dramatically towards massive corporations.

The matter of late payments is where this inequality hits home hardest. Small businesses rely on orders to survive, and in turn big businesses rely on small suppliers not to complain or withdraw services. 

Late payment periods doubled between 2018 and 2019 and continue to grow due to the dual impact of Covid and Brexit. At any one time, an eyewatering £23 billion is owed by late-paying companies, with small businesses inevitably at the back of the queue. The crippling impact this has on cashflow kills more businesses than any other factor.

Deep set issues 

This flawed playbook is deeply engrained in the way this country conducts business. Over the past three decades it has become standard practice to take delivery of goods, services and skills from small suppliers, freelancers and sole traders, then force them to wait for payment.

Operating the economy on credit has spawned an industry of middlemen offering finance in varying forms to those waiting to be paid, keeping them alive while big business further extends payment terms.

All along that chain the financing firms take their cut, which of course keeps people in jobs and the tax take up, but at what cost to freelancers and small business owners? On top of fees and charges there are sleepless nights, debt, broken relationships and insolvent businesses all contributing to the growing mental health crisis amongst entrepreneurs.

Identifying solutions

Solving the scourge of late payments must be an immediate priority. After all, it’s entrepreneurs who will deliver the productivity and growth needed to turbocharge the post-Covid recovery.

Embracing the benefits of the digital age could be the key to curing late payment syndrome. That’s why Lawbite have joined the pilot called for by the thinktank ‘Lawtech’ to operate an online platform for mediating late payments disputes for small businesses.

Big businesses can be held to account via this easy-to-access alternative to the small claims court, in which most late payment issues can be quickly settled using automated processes powered by machine learning. This negates the common issue of corporates having access to expensive lawyers who can protect them in late payment disputes against smaller businesses who simply cannot afford adequate legal services. 

Overall, mediation is quicker, cheaper, and less stressful. It can also be invoked without destroying the relationship between the big customer and small supplier on which so many small businesses depend. What’s more, Lawbite believe that the pilot will give more small businesses the ability to access mediation by adopting a simple streamlined approach to resolving the disputes caused by systematic bad business practices.

Time is ticking

It has taken a pandemic and visible problems in supply chains – which are now affecting consumers – to force people to understand what happens when small suppliers cannot be resilient due to late payments.  

And it’s ultimately the UK economy that suffers through the loss of skills, creativity, and enterprising individuals on whom bigger customers depend. Big businesses must recognise that paying fairly contributes to an enhanced ethical reputation, which attracts investors and skilled employees.

If small businesses are the engine room of the economy, they cannot run without petrol. Cashflow provides that fuel, so let’s make sure we don’t miss this window of opportunity to push for better payment processes and speed up the flow of payments to hard-pressed small businesses.

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Liz Barclay is the Small Business Commissioner. Clive Rich is the CEO of Lawbite.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.