In 2008, the UK Prime Minister promised that government, public agencies and the NHS would help SMEs by paying their bills more quickly. Fast forward to 2018 and late payments are still an issue. New measures have now been proposed by the UK Government which, if passed, would mean that companies that fail to pay SMEs in a ‘fair and effective’ manner will not be able to bid on public sector contracts. The failure of Carillion has brought more focus on how late payments seriously threaten the integrity of the supply chain and the viability of SME suppliers.
Back in 2011, the European Commission’s Late Payment Directive stated that, for B2B transactions, payment terms should not exceed 30 calendar days. If longer, they must be expressly agreed in the contract, extend to no more than 60 days and must not be grossly unfair to the supplier. The Commission has repeated the 30 days requirement in subsequent communications, most recently in April 2018's Directive on Unfair Trading Practices in B2B relationships in the food supply chain.
And yet, despite these efforts, many suppliers are still not being paid on terms. Last year, a Bacs report stated that UK SMEs spent £2.16 billion chasing overdue payments and were owed £14.2 billion. Out of 1.7 million SMEs in the UK, almost 640,000 reported that they have had to wait beyond the agreed terms for payments.
Data on some companies’ payment behaviours in the UK can now be found online. In April 2017, the UK Government required all large UK companies to publish details of their payment performance and average time taken to pay supplier invoices. The Payment Practice Reports currently contain data from over 1400 large companies. 62% report an average time to pay their suppliers of over 30 days. Half of them report that more than 25% of invoices are not paid within agreed terms.
So far, the author has not had any experience of late payments. However, a recurring topic in recent discussions has been evidence of a disconnect between buyer and supplier. For example, an invoice is submitted and the supplier chases their client after payment has not been received on the agreed terms. Only then is an error on the invoice highlighted, e.g. a typo or a mismatch between GRN/PO/receipting/invoice/taxpoint. There has been no lack of willingness to pay on the agreed terms, but effective processes to review the invoice when received are not in place. There are a range of online tools and services that have been designed to address the issue, reduce friction and increase the velocity of payment processing, further supported by comprehensive reporting and tracking tools. Their existence should mean that current levels of late payments are something that happened in the pre-digital age.
Of course, we still hear of extended credit terms being demanded by a buyer, but those arguments can often be addressed (e.g. prompt payment discounts that exceed treasury rates or commercial cards offering credit terms to the buyer that ease the timing between expenditure and revenue). Placing undue strain on the supply chain is a limiter to economic growth and increasing the velocity of payments injects substantial liquidity into a national economy.
There really should be no reason for a supplier to suffer repeated payment delays for goods or services that they have successfully and diligently delivered. Nor should they have to view chasing for late payment as part of normal business. Is it because multiple invoice processing and payment solutions represent too much choice, therefore breeding inertia? Are they perceived as too complicated, is it because decision-makers are too time poor to make an informed decision, or is it the perceived effort and cost?
The processes for paying suppliers on terms should be straightforward and effective solutions do exist. They do not have to be complex or confusing.
Image Copyright: Illia Uriadnikov