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02/07/2019

Late payment: causes, effects, and solutions

Late payment is a pandemic in the UK. The business community, Government and a range of industry bodies have denounced it, yet it is still widespread across the UK’s corporate landscape.

Our new President Duncan Swift has made highlighting the problems caused to businesses by late payments and taking steps to tackle them priorities for his year in office.

“Late payment is the cause of a great many problems for businesses that would otherwise be successful and profitable,” he says. “I’m determined to use my year as President to work with the Small Business Commissioner, the Chartered Institute of Credit Management that oversees the Prompt Payment Code, and other organisations to encourage the Government to take action on this issue.”

Background to late payment

Customers paying suppliers after the due date on their invoice is not a new problem. It’s been going on for years as some businesses seek to manage their cash flow at the expense of their suppliers.

By withholding payment, the business can use that money for its own requirements. It’s effectively a form of ‘free’ money, at the expense of the supplier to which the money is owed and without the costs associated with loans.

The effects of poor payment practices

Being paid late doesn’t just hit a business’ cash flow; it can have an impact on its health and the health of its supply chain.

But not only does being paid late make it harder for businesses to function, poor payment practices create a vicious cycle where these businesses are forced to pay their own suppliers and sub-contractors late if cash is held up at source – making a bad situation worse.

Ultimately, late payment can lead to insolvency. An R3 survey in 2016 found that late payment for goods or services was a primary or major cause of 23% of insolvencies that had occurred that year, according to our members. This can have a further knock-on effect: R3 research from June 2018 found that over a quarter (26%) of UK companies have suffered a hit to their finances following the insolvency of a customer, supplier or debtor in the last six months. It’s the job of the insolvency and restructuring profession to try and minimise these knock-on effects and maximise what can be returned to creditors, often by recovering late payments – money which may have stopped the company from becoming insolvent if it had been paid on time in the first place.

What’s being done about it?

Successive Governments have attempted to tackle the issue of late payment. Codes or charters are a favourite option – they represent a public commitment to paying suppliers fairly. One example is the Prompt Payment Code, which companies sign as a means of demonstrating their willingness to commit to paying their supply chain fairly and promptly.

But more recently, the Government has become more assertive when it comes to late payment. In November last year it announced companies who paid their supply chains late would be banned from winning government contracts. With potentially hundreds of billions of pounds’ worth of work at stake, that’s a pretty strong incentive for companies to pay on time.

Nearly six months later, the Small Business Commissioner suspended 17 companies from the Prompt Payment Code for failing to adhere to its terms – a very public statement that actions speak louder than words when it comes to payment and that promising one thing while doing another is unacceptable.

Future plans

The Government has announced it will consult on plans to give the Small Business Commissioner powers to compel firms to disclose information on their payment practices, to potentially fine businesses who pay their supply chain late, and to be responsible for the Prompt Payment Code. It will be interesting to hear what shape and form these plans will take once the consultation is launched later in the year – and whether the Commissioner will have the power to administer sanctions for any breaches of the Code.

This consultation – like many that focus on the sometimes emotive area of prompt payment – will generate a lot of debate. But one thing is clear: solutions need to be found. We remain committed to working with the Small Business Commissioner, the Chartered Institute of Credit Management, and other organisations to encourage and help Government develop these – and to improve the business climate and the functioning of the overall economy by doing so.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.