The Late Payment Trend

Many large retailers, including Halfords, Asda, Tesco, Homebase and Debenhams will keep businesses waiting for around 120 days for their money (as well as a 5% discount on your prices). While these terms may or may not have been agreed in advance, a culture of late payment in business has become the norm in the UK.

Experian (provider of retail data) reports that the average payment across all UK industries is 62 days. Larger companies usually average 76 days, with vehicle and equipment rental companies the worst at 85 days.

The credit crunch may see these figures get worse in 2008 as businesses try to hold on to their cash for as long as possible.

How does late payment impact Small Businesses?

Many large businesses fail to recognise the impact of their late or non payment throughout the supply chain. Rigorous credit control needs to be developed and implemented internally by the small business, to ensure outstanding invoices are chased and paid and an ongoing dialogue develops to highlight any potential problems from the outset.

The government would argue that smaller companies are demonstrating that the Late Payment of Commercial Debts (Interest) Act is working, with small companies making conscious efforts to improve payment times as close to the 30 days (recommended in the Act) as possible. However the reality is that charging interest to late payers is seen as damaging relations with customers and does not solve the immediate cash flow problems that delayed payment creates.

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Does anyone benefit from late payments?

After a 2005 Financial Mail article estimated that delaying payments allowed companies such as Halfords to benefit from an estimated £53.2million extra funds in 2006, the company immediately refuted the notion that they were exploiting suppliers to push their own expansion plans.

Unfortunately, the ethicality of Halfords and other major retailer’s actions’ in this matter is almost irrelevant. Whilst they are still able, late payment from major retailers looks set to continue. As a supplier, the most effective practice you can employ is to prepare yourself for the possibility of late payment and not waste too much time fighting the big players.

Three immediate ways to effectively address late payment:

1) Open dialogue and clear terms – terms should be clearly stated on every invoice. Regular contact will ensure customers are happy with your products or services, and that any potential payment problems are raised promptly. Payment terms can be used as a negotiating tool when asking for discounts or drawing up a new contract, i.e. offer early payment discounts as an incentive to pay within 14 days.

2) Credit check! – Companies such as Experian, Equifax and Dun & Bradstreet all offer a relatively low cost service to get a credit score on your customers. This score will also have payment behaviour records. Credit services are becoming more transparent, and it is now possible to see a credit score on some websites, for example social business networking site BView.co.uk.

3) Finance your cash flow – Over 40,000 companies in the UK have turned to invoice finance to keep them trading and expanding business with more likely to follow in the face of difficulties getting overdrafts and loans from the bank. With invoice finance the debt is short term – only as long as the debtor takes to pay their invoice – and the costs are comparatively reasonable. With invoice finance the money owed to you is advanced against the invoices you raise – the more invoices you raise the more cash you receive.

The late payment culture doesn’t look like it will be disappearing any time soon and the credit crunch shows no signs of abating. As a double act they both spell trouble for the small business. However, the key with managing any business issue is to look into your options early on and talk to your key customers and suppliers regularly.

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This article was first published on Simply Business

Written with input from Adfero