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Late payment is a persistent problem for SMEs

In December, UK Debt Collection News (UKDCN) reported on government findings that SMEs were dealing with an average of £22,000 in overdue debt.

Late payment by debtors is a bugbear for any business. However, for small and medium sized enterprises (SMEs) it can be a critical issue, putting severe pressure on cash flow and threatening financial stability.

UKDCN recently highlighted the seriousness of the late payment epidemic across the UK. That being said, by showing the scale of the issue, it will at least reassure small business owners that they’re not alone in having to deal with problem debtors.

The bedrock of the UK economy

According to government statistics, SMEs account for 99.9% of the UK’s 5.5 million private sector businesses. Therefore, late payment is a major issue for the UK economy, posing a risk to the cash flow and financial integrity of so many businesses across the country.

UKDCN’s article highlights research by the Federation of Small Businesses (FSB), showing that 50,000 SMEs are estimated to go out of business each year, referencing cash flow as one of the causes of their demise.

The article also refers to the recently published Prompt Payment and Cash Flow Review Report, in which the government highlighted the challenges facing many SMEs (see our previous blog). Data from a report published by Sage and Smart Data Foundry showed that the average SME was owed approximately £22,000 in late payments at any one time. For a

typical business, that means permanently having almost half of your total outstanding invoice value overdue.

Some good news

Although late payment and long payment terms continue to have a negative effect on the UK economy, there are some positives to take away. The average time for an invoice to be paid reduced by 55% from 81 days in 2010 to around 36 days in 2020–2021. In almost all UK regions, the speed and timeliness of payments reduced, and the gap between the best and worst areas became smaller. However, this good news comes with a sting in the tail. It’s still the case that some 40% of credit sales invoices are not paid on the agreed invoice terms, with about 12% being over 30 days beyond terms.

Source: Sage/Smart Data Foundry research

Time is money

A lack of time and resources can make it difficult for SMEs to deal effectively with problem debtors. According to UKDCN, research by Intuit Quickbooks found that 56.4 million hours are wasted each year by businesses chasing late payments, while online accounting business Xero estimates that late payments cost small businesses £684 million each year.

Existing legislation can help. The Late Payment of Commercial Debts (Interest) Act 1998 gives you the statutory right to claim interest on an overdue debt, as well as compensation for costs you've incurred in debt collection.

In addition, it could be a good move to streamline your payment processing systems, for example by encouraging customers to use direct debit or card payments, rather than waiting for payment of your invoices by direct bank transfer.

Is it time to bring in the professionals?

Despite your best efforts, you may still be struggling to persuade some customers to pay what they owe you. If so, it could be time to get expert assistance from a professional debt collection agency (DCA). A good DCA can take away the pressure of having to chase customers for payment and help you reduce the risk of debt default.

Why you can trust Redwood Collections to deliver

At Redwood, we have many years’ experience of working with SMEs, helping them to recover overdue debts promptly and cost-effectively. We can also help with debt management, providing valuable advice and support or handling credit control processes on your behalf.

With Redwood as a trusted partner, your business can Grow Stronger.

Find out more about the government findings by reading the original article from UK Debt Collection News here.

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