How we use Cookies

Late payments are so damaging to the SME sector

Professor Dylan Jones-Evans explores the damaging impact of late payment to SMEs and how larger companies could fund firms their supply chains

Welsh SMEs are owned more than £1.5bn at any one time in late payments

ONE of the most under-appreciated but most important issues in relation to the funding of SMEs (small to medium sized enterprises) is that of the availability of trade credit.

While there has been a focus on lending from banks, it must not be forgotten that according to the latest statistics, 69% of Welsh SMEs are classed as “happy non-seekers” ie, those SMEs that had not had a borrowing event with a bank and also said that they had not wanted to apply for any (further) debt funding in the previous 12 months.

The question is how do such businesses survive without cash?

The answer is that they rely on credit from other businesses – more than 80% of all business- to-business sales are made on credit, allowing SMEs to ask suppliers for twice as much short-term credit as they obtain from banks.

In fact, SMEs in the UK typically owe their suppliers an amount equal to a fifth of their total assets and this did not go unnoticed by the review  by Tim Breedon into alternative sources of finance in 2011.

This recommended that large companies should play a bigger role in supporting smaller suppliers.

Indeed, given the close relationship between large and small firms in the supply chain, it may be possible for cash positive businesses to extend credit to their suppliers, especially as existing commercial relationships enable greater control over the recipient.

In addition, alterations and simplifications to procurement processes to make contracts more accessible to small businesses would also generate business and cash flow for them, thus reducing reliance on bank lending.

However, trade credit can also work negatively for SMEs in the form of late payment or payment outside of agreed credit terms, which is seen as one of the biggest problems faced by the SME sector in the UK.

According to the Forum of Private Business (FPB), more than a million SMEs in the UK face late payment difficulties, equivalent to 20% of the business population (or about 40,000 SMEs in Wales).

The amount tied up in late payment across the UK had risen to nearly £37bn and extrapolated to Wales, this would mean that £1.5bn is owed to Welsh SMEs, equivalent to a third of the total amount loaned by the banks.

This is most acute within the construction industry, one of the most micro enterprise intensive sectors in Wales.

Within the first stage of my access to finance review for the Welsh Government, late payment was seen as a key concern by respondents especially for the smallest of companies that can often get into serious financial difficulties if their customers refuse to pay them on time.

It is not only the amount of money owed but also the uncertainty of the payment which, coupled with amount of management time involved n chasing payments, can put pressure on the creditor’s relationship with their own bankers.

And with banks reducing the availability and size of overdrafts to many small firms, this can cause serious financial difficulties to many businesses facing such a squeeze from their customers due to late payments.

Of course, one can argue that there should be a “name and shame” approach to those businesses that fail to pay within an agreed time limit but that has been tried and seems to have little effect.

There has also been an increase in the promotion of invoice discounting as a form of finance by banks.

This is where the finance provider pays an agreed proportion (usually 80-85%) of approved invoices to the company on receipt of a copy of the invoice.

The balance, less a charge, is then paid upon client payment. However, only 42,000 firms across the UK use this method and while it can improve prompt payments, it is not suitable for all businesses

Finally, various legislation has been enacted to ensure that any late paying firm faces additional costs but this does not deal directly with the main issue, which is the cashflow squeeze that comes from any delay in the payment of the money due to that business.

Therefore, what can be done to ensure there is a better environment for payments of debts to SMEs in Wales?

One of the ideas proposed during the access to finance review was for the Welsh Government to explore how it can, as the biggest purchaser in Wales, encourage its own suppliers to adopt supply chain finance or similar schemes to support their suppliers.

In addition, it could set an example by ensuring that all contractors operating within the public sector in Wales have to pay their suppliers within a maximum 30-day period while ensuring that it adheres to such a policy itself.

With more than £4.3bn being procured via the public sector, this could have a major effect on the cashflow of a significant number of smaller businesses across Wales.

The Welsh Government could also build in such conditions into other programmes that it currently manages.

If adopted, such a condition could, overnight, change the credit position of many SMEs in Wales and hopefully begin  a trend in which businesses  are paid on time and no longer have to rely on short-term  and expensive financial  solutions from the banking sector.



David Williamson
Political Editor
Martin Shipton
Chief Reporter
Peter Law
Chief Reporter
Clare Hutchinson
Crime Correspondent
Gareth Evans
Education Correspondent
Julia McWatt
Health Editor
Karen Price
Arts Editor
Sion Barry
Business Editor
Paul Abbandonato
Head of Sport
Chris Wathan
Swansea City Correspondent
Terry Phillips
Cardiff City Correspondent
Simon Thomas
Rugby Correspondent
Andy Howell
Rugby Correspondent