Businesses need help with late payments - and they need it now!

Trade credit is the lifeblood of many businesses, enabling them to participate in the essential exchange of goods and services with other enterprises.  

In the UK, Atradius research shows almost two-thirds of B2B sales are being made on credit. In other words, trade credit is a huge part of business transactions, which is often taken for granted.

But, of course, trade credit arrangements only work when businesses are paid on time. When a business doesn’t receive the payments it is relying on, then management may be unable to pay their staff or cover their other costs. They won’t be able to invest in future growth. They may even be forced to restructure their financing or close down altogether. All of this hurts the business’s own suppliers too. It creeps out into the wider economy and saps growth. 

Late or failed payments, and bad debts, are damaging for businesses of all sizes. But small businesses and microbusinesses are at particular risk. Estimates vary, but data published by the government last year showed that a typical small business is owed approximately £22,000 in late payments. This figure will be much higher in some cases, crippling firms. 

It’s little surprise that businesses waste precious hours trying to claw back the money they are owed: four hours or more a week is wasted this way according to one report. We know from businesses we speak to that this is much higher in some instances.  

Worse still, late payments cause huge amounts of stress for business owners worried about how they’ll keep their operation afloat without the money they are owed: two fifths of SME owners say that their mental wellbeing has suffered as a result of late payments and one third have had sleepless nights.  

Ultimately, late payments kill businesses, with 82% of small businesses failing because of cash flow problems, and late and long payments contributing to an estimated 50,000 UK business closures each year.  

Late payments and bad debts 

So, what is the latest state of play for businesses? The latest Atradius research on B2B payment trends, our 2024 Payment Practices Barometer, shows a worrying upward trend in late payments. Overall, late payments are currently affecting 40% of B2B sales across all sectors in the UK, while bad debts stand at an average 7% of all B2B sales. 

Companies operating in the construction industry are under particular strain, collecting payments one month past the due date on average. The consumer durables industry is also being significantly affected, causing cashflow imbalances as they collect payments an average two weeks past the due date. Businesses in the electronics/ICT sector tell us they are collecting payments three weeks past the due date and are responding by slowing down payments to their own suppliers. 

Worryingly, nearly half of the companies in our survey said they expected B2B customer payment behaviour to deteriorate in the 12 months ahead, with the potential for severe liquidity issues. The feeling is widespread, but especially prevalent in the UK construction industry.  

So, now more than ever, help is desperately needed. 

 Stamping out late payments 

Successive governments have sought to relieve businesses of the burden of late payments, and the new Labour government is no exception.  

It has promised to stamp out late payment of invoices to small businesses. We don’t yet know the details, but ahead of the election, Keir Starmer’s party promised it would “require large businesses to better report on their payment practices to expose late payers”. 

Jonathan Reynolds, the new business secretary, had already spoken about the need to crack down on late payments before the election. In October 2023 he promised “Labour’s plans would go further, faster with new legislation to ensure all large companies, not just government contractors, will have to report on their payment practices and demonstrate they are prompt payers.” 

Naming and shaming late-paying businesses, as Labour has proposed, would put pressure on them to pay their invoices on time. 

We haven’t yet got details on how this would work, or whether it would be accompanied by strict enforcement and penalties for companies that don’t comply. But it would certainly be a step in the right direction. The government is on a mission to kickstart economic growth and tackling late payments would be one sure-fire way to achieve that. 

Even with these proposed measures we wouldn't expect an immediate end to the late payments crisis. Here are some simple tips to help prevent and manage late payments:

1. Set clear terms: clearly state payment terms in your contract, including any interest on late payments and ownership rights for unpaid goods. Have customers sign these terms with their order.
2. Monitor payment behaviour: stay vigilant about your customers' payment habits and check for warning signs like delayed payments or unusual payment methods.
3. Invoice promptly: send invoices as soon as possible with clear deadlines.
4. Follow up early: check in with customers a few days after sending the invoice to confirm receipt and to remind them of the payment due date.
5. Address overdue payments immediately: as soon as a payment is late, call the customer to inquire about the delay and politely remind them that interest is accruing.
6. Keep records: document all communication regarding payments and send summaries to the customer after each call.
7. Handle payment promises: if a customer claims they've posted a cheque, ask for confirmation, such as a cheque number or a copy of the signed cheque.
8. Collect in person if local: for local customers, arrange a time to visit their office and collect the payment in person.
9. Send a formal letter: if personal visits aren't possible, send a letter summarising your efforts to collect the payment, referencing your terms, and outlining next steps, including potential legal action. 

And finally, the greatest tool firms can equip themselves in the fight against late and failed payments is trade credit insurance. This really is the best way to assure your cash flow and trade with confidence. 

In the meantime, we eagerly await the next steps from the new government to help reduce the burden of late payments. Just imagine the positive impact it could have on businesses, their owners and employees and the economy.