When it comes to tackling late payment, the proof will always be in the pudding. And the government has laid out its ingredients. But will the new Fair Payment Code do the job? And if it doesn’t, what can small businesses do?

What damage is late payment doing to small firms?

Goodbye Prompt Payment Code, hello Fair Payment Code. The government has set out is stall as it attempts to solve the long-standing and highly costly problem of late payment.

New research on the impact of late payment from the Department of Business and Trade is yet more grist to the mill for those campaigning for meaningful action against it. According to the data, on average SMEs are out of pocket to the tune of £22,000 thanks to late payment, with the practice leading to 50,000 firms having to permanently close their doors per year.

New figures from the Federation of Small Businesses provide a similar reminder of its impact. According to the organisation, over half of small firms are hit by late payments every quarter, which amounts to around 2.6 million businesses. In a climate where small business growth is vital to economic recovery, late payment represents a significant barrier to forward momentum.

How will the Fair Payment Code tackle late payment?

What does the Fair Payment Code look like? While the initiative is still very much in its development phase, which puts a question mark against its effectiveness, its composition offers long-disappointed small businesses a degree of optimism.

Interestingly, the government has laid out a plan that contains measures that threaten to have both a reputational and financial impact. One of the central proposals is new legislation that will require large firms to include details of their payment performance in annual reports, while this information will also have to be submitted to HMRC twice a year.

Another key tenant is the threat of unlimited fines and criminal records for directors of businesses that do not comply with the new Fair Payment Code. Self-police or face real policing is seemingly the message.

Dealing with overdue invoices and how alternative finance can help

The Fair Payment Code offers some optimism, but small businesses won’t be hanging out the bunting yet. Rhetoric and reform has come and gone on a regular basis for a decade and more, and the problem remains resolutely unsolved. This is why other solutions and protections are important to small firms. And this includes alternative finance.

Services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in the current funding climate (with 65% more SMEs experiencing difficulty in accessing finance from high-street banks). In particular, invoice finance is allowing firms to secure capital without putting key business relationships at risk. As much as 90% of an approved invoice can be advanced by a finance provider, with the remainder settled by the client.

This profile has helped cement the reputation of alternative finance in the business sector. Notably, the new Growth Guarantee Scheme will provide a wide range of finance facilities to smaller firms, including invoice finance. This is further proof that alternative lenders are increasing filling the small business funding gap.

Small business finance options for managing late payment

Will the Fair Payment Code succeed where the Prompt Payment Code has so abjectly failed? Only time, and economic fortunes and politician winds, will tell. The new government is talking a good talk, but it’s all about the walk.

As such, it is vital that small businesses position themselves as strongly as possible when it comes to managing the impact of late payment. They should be aware of all the options available to them, including invoice finance.

To find out more about A&T Business Associates services, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.