What can you do to help keep your firm afloat?

Late payments are increasingly undermining the stability of small businesses in the UK, threatening payroll, job security and growth potential according to new research. 

Bibby Financial Services found that more than two fifths (42%) of SMEs were prevented from paying staff salaries on time in the last 12 months thanks to late payments. 41% also admitted that the issue had forced them to dip into emergency funds to stay afloat in the last year too. 

There are several knock-on effects but including nearly a quarter (24%) pausing hiring as a result of uncertainty. 

Derek Ryan, CEO for North West Europe at Bibby said: “With economic growth already faltering, late payments are a significant threat to the survival of SMEs across the country, applying pressure to businesses already battling high operating costs.

“When firms are forced to make impossible choices – between hiring and surviving, dipping into emergency funds or struggling to pay staff on time – it’s a clear sign the Government needs to step in.”

A recently published Small Business Strategy report from the Business and Trade Committee has also called for more action. 

Evidence received found that small businesses are owed an average of £66,770 in unpaid invoices, an annual increase of 10%. Furthermore, over six in ten (62%) said customers were taking longer to pay invoices in full compared to a year ago.

38 businesses a day are closing

The latest evidence, supplied by research from Funding Circle, estimates that 14,000 small and medium sized businesses are closing a year – 38 a day. 

Construction is the most exposed sector with 2,100 firms closing in 2024 alone, driven by delayed payments, long payment chains and thin margins. 

This is followed by Professional Services (1,855); Retail and Administrative sectors.

The situation is worse for micro businesses with late payments accounting for 4.61% of their annual turnover (1.47% for small businesses). While the absolute value of late payments is typically lower for smaller firms, a far greater proportion of their turnover is tied up in unpaid invoices.  

Funding Circle also found that late payments don’t just restrict cash flow – they also negatively impact productivity. UK businesses lose an estimated 133 million staff hours a year chasing overdue invoices with firms spending an average of 86 hours annually pursuing money they are rightfully owed.

The government has recently closed a consultation on late payments with the findings due to be published soon. 

In the foreword, Peter Kyle MP Secretary of State for Business and Trade, said: “This government is committed to tackling the scourge of late payments. 

“This represents a significant drag on UK growth and productivity. A healthy cash flow is critical for the survival and growth of the UK’s small businesses. Paying hard-working employees, settling bills with other businesses and investing in new capital, skills and ideas for the future all rely on timely and fair payment.

“Since being elected last year, this government has taken rapid action:

  • We are legislating to require large companies to include their payment performance in annual reports. This will give greater board-level oversight of payment practices and increase the transparency of large companies’ their payment performance. 
  • We have launched a new Fair Payment Code, delivered by the Small Business Commissioner. This is showcasing those companies who are setting an example by paying their suppliers quickly and fairly. 
  • We have appointed Emma Jones CBE as the new Small Business Commissioner. Emma brings a wealth of entrepreneurial experience to the role and will be a key player in tackling late payments. 

“We know there is more to do. That’s why we’re proposing a package of new measures that amounts to the most significant legislation to tackle late payments in over 25 years. We’re going further than previous governments and our international counterparts – giving us the strongest legal framework on late payments in the G7. We’re meeting our manifesto commitment to take action on late payments to ensure small businesses and the self-employed are paid on time.”

So what can small businesses do?

Fortunately, there are some things directors and business owners can do to help themselves if they’re spending increasing amounts of time and energy chasing their rightful dues.

Statutory interest can be charged on late payments to a maximum of the Bank of England base rate plus eight percentage points – today this would be 11.75%!

The rate is an annualised one but could be charged daily so for a £10,000 debt for example, it would accrue £1,175 annual interest or £3.22 daily. This sum is multiplied by the number of days late that the bill stands. 

Additionally, a business is entitled to charge a fixed sum to cover costs incurred while chasing the payment – including time. This can vary from £40 for payments due worth less than £1,000 up to £100 for bills of £10,000 or more.

In order to claim, issue a new invoice to the customer detailing what it is owed. If disputed then legal action could be used to enforce payment but for sums of less than £25,000, they can be pursued through the small claims court.

Alternatively, if a business owes you more than £750 then you could just issue a statutory demand.

It gives the recipient 21 days to pay in full with increasingly serious consequences if they don’t, including the threat of a winding-up petition being brought against them.

At the end of the day, cash flow is the lifeblood of your business. While late payments are always an inconvenience, for many small and medium enterprises they can be a threat to survival. 

It’s a sobering reality that many businesses face liquidation purely due to external payment delays.

If you feel like you’re treading water or are struggling to keep up with your own commitments, you don’t have to handle it alone. Get in touch with us for a free initial consultation. 

Our specialists will chat with you to help get to the heart of these and other issues and provide the practical steps needed to stabilise your finances and find your footing again for the rest of this year and beyond.