Late payment has long been a bête noir for small businesses, but for all the lobbying and discussion, the problem remains. However, a recent move by the government could put some lead in the Prompt Payment Code pencil. It also emphasises the importance of invoice discounting.
Over the last 18 months, evidence has mounted on the impact that late payment has on SMEs and on small business finance. Most recently, a report by payment body Bacs revealed that the average small business was owed an estimated £45,000 and the whole SME sector a total of £35 billion.
Previously, a Royal Bank of Scotland survey had found that small businesses spend an average of 130 hours a year chasing outstanding invoices and that SMEs are being paid on average one month after the agreed payment date, while a report from Lloyds TSB had found that late payments were a leading cause of financial concern among three quarters of small businesses.
Well, the SME sector could finally see some action with regard to late payment after the business minister fired a warning shot across the bow of big business. The country’s 350 largest companies have received a letter telling them that they will be named and shamed if they fail to sign up to the new payment code. In addition, there have been calls for even more pressure to be put on big businesses with public sector contracts.
How these major companies react and what affect the Prompt Payment Code has remains to be seen, but the new round of headlines can only have a positive impact. The move by the business minister also highlights the importance of invoice discounting as an alternative finance service.
Legislation allowing small businesses to charge interest on late payment foundered as SMEs feared losing large customers, but invoice discounting has long offered a means of ensuring prompt payment and safeguarding cash flow without damaging key relationships. This is just one reason why invoice discounting is driving the growth of alternative finance.
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