The growing gap in payment terms between SMEs and larger businesses is threatening survival
The gap between how long it takes large and small businesses to be paid by customers continued to grow with SMEs waiting almost double the length of time as their larger counterparts.
Small businesses now have to wait an average of 71 days compared to the average of 38 days for larger businesses according to data released today by the Asset Based Finance Association (ABFA) – a body that represents 95 per cent of asset-based lenders.
“The impact of delayed payment on businesses’ cash flow and capacity to expand order books presents a serious concern – particularly for smaller companies. Even when a business is thriving, just a few unpaid invoices can end up a real threat to survival,” said ABFA's Jeff Longhurst.
Many businesses choose to mitigate the delay in being paid by factoring debts – a process where a bank or financial institution advances the money it is due to receive from customers. However, this process has a cost attached to it as the lender will take a fee for advancing the cash.
In July this year ABFA released data showing that the amount of invoice factoring advanced to SMEs had jumped by 60 per cent between the first quarter of 2015 and 2016. A total of £711m was advanced to companies with annual turnover less than £500,000, up from £434m in 2015. This had dropped from £485m in 2014.
The government has attempted to address the issue of late payment of invoices by introducing a Prompt Payment Code in 2013 and appointing a small business commissioner.
However, ABFA called on the government to do more as these initiatives failed to address key relationship challenges.
“Despite a number of well-meaning initiatives, late payment and extended payment terms remain an acute issue for many businesses.
“Unfortunately, the need to protect client relationships renders the issue a complex one, with no quick-fix.
“The desire for repeat business means that many businesses are reluctant to charge clients interest, report ill-practice or to push back on suppliers imposing extended payment terms. This is particularly true for SMEs- where the loss of one substantial account could be devastating,” said Longhurst.
ABFA added that the Brexit vote is likely to exacerbate problems for smaller businesses.
“There are concerns that big business will start hoarding cash as a response to the Brexit vote. One of the ways they normally do this is by delaying payments to suppliers,” said Longhurst.
Last Thursday, Theresa May held a round-table discussion with small business leaders who are concerned with the fall-out from the Brexit vote.