Average wait for payment for smallest businesses now 71 days- up from 64 days before credit crunch
Small businesses are forced to wait an average of 23 days longer for payment by customers than the biggest businesses, says the Asset Based Finance Association, the body representing the asset based finance industry in the UK and the Republic of Ireland (see graph below).
The ABFA says that over the last year, businesses with turnovers of less than £1 million have waited an average of 71 days to receive payment from their customers. Businesses with turnovers of more than £500 million were paid far more quickly, in an average of just 48 days*.
The ABFA says that during the credit crunch and recession, many small businesses have seen their bigger customers make increasing use of their power over their SME suppliers to gradually lengthen payment terms. This weakens the SMEs' cash flow, making it more difficult for them to ensure that they have sufficient cash to pay wages, meet tax bills, invest in new equipment or staff, and cover other major expenses.
Despite the Government putting pressure on big businesses to sign up to the Prompt Payment Code, small businesses now wait a week longer for payment than they did prior to the credit crunch – 71 days compared with 64 days in 2006.
The Prompt Payment Code was established in 2008 to improve SMEs' financial stability by helping them to recover the tens of billions of pounds of late payments owed to them more quickly. It is a voluntary register of almost 1,700 UK companies that have committed to pay invoices to suppliers in accordance with contracts, and not attempt to change payment terms retrospectively. However, there are no fines or other sanctions for signatories that breach the code.
Jeff Longhurst, Chief Executive of the ABFA, says:
"These figures highlight that the relationship between some big businesses and their smaller suppliers has become even more unbalanced since the credit crunch – and Government efforts to address this have not had a great deal of impact.
"It is alarming to see how much longer SMEs are waiting to receive payment compared to just a few years ago. It is putting some SMEs in financial difficulties, and it certainly makes it more difficult for SMEs to make the investments in staff and equipment they need to respond to the recovering economy."
The ABFA explains that small businesses can access the funds kept from them by late-paying customers through invoice finance. Invoice finance allows businesses to receive payment up front for their unpaid invoices, making sure that they are protected against unfair payment practices by their customers, and letting them invest in their growth.
Jeff Longhurst adds: "It's more important than ever that these businesses are aware of the options they have to get around the roadblock of late payment, and free up the funds they need more quickly."
The ABFA adds that its members provide an average of £17.5 billion of invoice finance to British businesses at any one time, up 9 per cent in a year and 29 per cent since the peak of the recession in 2009/10. More than 20,000 small businesses in the UK currently use invoice finance.
"Invoice finance helps businesses to improve their cash flow, and is an effective way to unlock the value of one of a business' biggest assets – its unpaid invoices."
Small businesses waiting 23 days longer for payment than biggest companies
* Source: analysis of Companies House data on 129,000 UK businesses