5 things the incoming Small Business Commissioner should consider in the fight against slow payments

Comment, Knowledge Centre

Originally posted in FinExtra

Liz Barclay’s appointment as Small Business Commissioner was the latest development that reflected the UK’s longstanding and worsening slow payments crisis.

Liz’s new role will see her serve as guardian of invoices owed to SME suppliers, championing their prompt payment against a backdrop of drawn-out payment terms: a problem which has worsened over the past year.

Liz’s is an important role which comes at a crucial time. Late payments kill 50,000 businesses each year and in January, the total value of invoices owed to UK SMEs amounted to a staggering £50 billion. Businesses are capital starved as a result of the pandemic, and when orders start to pick up they will struggle to fulfil them, because they don’t have the working capital for growth.

Previse has long been an advocate for getting all suppliers – no matter what their size – paid not just on time, but immediately. That’s how the consumer market works: when we buy something, the seller is paid immediately. There is no reason that can’t happen in business. Our InstantPay technology makes this possible, with no negative impact to the Buyer, and we are proud of the impact we have made so far.

However, we recognise that Liz Barclay faces a substantial – yet not insurmountable – challenge in seeking to bring about “a real culture change around business payments in the UK”. With that in mind, we have laid out five things which might help tackle the problem and break the back of the chronic slow payments culture in the UK:

1.      The Prompt Payment Code should be strengthened

The government’s PPC is a voluntary scheme, to which signatories join entirely at their own will. While the concept is encouraging and signatories are to be applauded, we aren’t convinced that any deterrent-based schemes will be effective in solving slow payments. The PPC has not yet had the required effect in really impacting the issue of slow payments, even through naming and shaming bad players. We propose that the PPC should pivot towards a more incentive-based scheme and become mandatory, in order to be strengthened.

2.      New technologies are the driving force behind prompt payments

Advances in new technologies are such that customers expect to make and receive payments immediately. Unfortunately, this does not extend to the world of B2B payments. There is an astounding irony in this, as machine learning exists to get all suppliers paid instantly and at no extra cost to large corporates. Harnessing past invoice data to make a probabilistic assessment of payment is an easy and effective way to get all suppliers, even the very smallest, paid instantly. 

3.      The buck doesn’t stop at large corporates 

B2B payments are positively archaic when compared with B2C, with the former seeing payment terms range from 30 to 120 days. We need to bring about a cultural shift in attitude towards the chronic slow payments problem that puts so many SMEs out of business every year, and this point is one that Liz Barclay is absolutely correct in identifying. Easier said than done to bring it about, however, but banks can contribute by providing the funding to get suppliers paid on day-1. Fintechs can contribute by providing the smart assessment of payment probability to unlock that funding immediately. Corporates can contribute by securely unlocking their ERP data.

4.      Fast payments equals sustainable financing

Committing to faster payments is a tangible way for banks and businesses to meet ESG criteria. The environment is critical to sustainability, but banks and businesses also need to focus on the S (social value) and the G (governance). There is much low-hanging fruit to make meaningful progress towards an ESG-oriented strategy by improving day-to-day processes, particularly where small businesses are concerned, by supporting sustainable finance for real social value. Government-led cash initiatives such as CBILs are commendable, short-term solutions to a chronic problem. What the SME community needs is a route to sustainable financing that doesn’t lead to a wall of mounting debt. At the same time, banks and businesses can put their money where their mouth is when it comes to ESG.

5.      We need to focus on slow payments, as well as those that are late

Because payment terms can range from 30 days to four months (sometimes more), a supplier can be left waiting weeks or months to be paid yet, according to the terms of payment, still be paid ‘on time’. If we want to bring about a cultural shift in payments, we need to acknowledge the issue of slow payments as well as those that are longer than the agreed payment terms and therefore ‘late’. The reality is that, for many small suppliers, 30 days is 30 days too late in the wait to be paid. In the worst case, many businesses could have started a new business entirely in the time they wait for their invoices to be paid.

While the above are not catch-all solutions to the slow payments problem, they are a starter for ten in approaching what is a chronic issue that has plagued suppliers for years.

We are confident that Liz Barclay will apply her many years of experience to the challenge at hand and make a considerable impact on improving B2B payments. We warmly welcome Liz in her new position and wish her the very best of luck in approaching her new role. 

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