Despite increased attention on the slow payments crisis, a staggering 83 percent of small suppliers and 89 percent of public sector suppliers in the UK are still experiencing late payments, according to new research from the FSB.
Slow payments are destroying SME suppliers, hurting large buyers and ultimately, holding back the overall economy. It’s in everyone’s interest to solve this problem.
It’s clear the UK Government recognises this crisis.
Just last week, it committed to paying 90 percent of undisputed invoices from SMEs within five days. This is even better than the current world’s best practice for paying SME suppliers. That’s a terrific ambition and will have a huge boost on the economy, jobs and wellbeing. But it will be extremely hard to achieve in practice, particularly as none of the current market tools address SMEs.
This follows a promise from Chancellor Philip Hammond to crack down on slow payments in his spring statement earlier this year and further commitments from Government figures in the wake of the Carillion collapse.
However, the new FSB figures demonstrate the problem is far from being dealt with.
Bad Business for Everyone
Slow payments, caused by lengthy payment terms, are one of the leading causes of small business bankruptcy in the UK. Their impact isn’t only felt by SMEs. They add unnecessary cost throughout the entire supply chain, affecting both suppliers’ and buyers’ bottom lines.
Suppliers go long periods of time, from 30 right up to 180+ days, waiting to be paid. During these long waits, they are forced to turn to expensive credit to balance their cash-flow. When you add the time and resources spent chasing invoices, the cost of business increases substantially, leading to higher prices for buyers.
The problem stretches far beyond our shores. Slow business to business (B2B) payments cost the world’s businesses US$650 billion every year.
This is an extremely wasteful way to do business.
This problem holds a major opportunity for the UK Government.
UK public sector procurement was worth £223 billion in 2017. Imagine the transformative effect that enabling that money to be paid to suppliers instantly would have. If the Government can deliver on its promise to pay 90 percent of its suppliers within five days, it will be a big shot in the arm for British productivity and the economy.
Speeding up payments will preserve and create hundreds of thousands of jobs across the UK, save businesses money and give our economy a huge boost. This is an opportunity for our public services to be at the cutting edge of a complete transformation in commerce.
That said, it’s easy to highlight the importance of speeding up payments, the benefits of which I’m sure the UK Government is aware. It’s much more difficult to achieve.
Legislation is not the Answer
The Carillion bankruptcy left suppliers owed £800 million, putting many out of business. In response, the UK Government considered introducing legislation to speed up supplier payments.
Former Business Secretary Greg Clark said back in March the Government was looking into strengthening payment policy. A month later, Cabinet Office Minister Oliver Dowden suggested banning outsourcing giants with poor payment practices from major contracts.
I would argue we don’t need legislation or regulation to make real progress with slow payments, especially as the Government already has its hands full with Brexit. This would take time and significant cost to draft and implement, and also could lead to regulatory arbitrage.
Furthermore, I don’t think focusing on a stick without a carrot will be enough to solve this issue. Instead of tightening regulation to encourage large organisations to improve their payment practices, we need to incentivise them.
The good news is that the tools required to achieve and surpass this promise already exist, thanks to modern, smart technology. They just need to be adopted.
Collaborating to Set a New Global Standard
From our engagement with the UK Government, from Number 10 down, we know first-hand that solving the slow payments issue is a key priority across all departments.
However, this isn’t the kind of problem that can be solved at the stroke of a ministerial pen. There are structural reasons payments take time: we wouldn’t want every payment to be waved through without proper scrutiny. It would open up public purchasers to the risks of accidentally paying duplicate invoices, paying the wrong amounts or not getting what they paid for.
Invoices need to be checked, but this is an extremely manual and time-consuming process. What is required is a technical solution.
New machine learning technologies create the opportunities for automation and using invoice data to speed up the process. These approaches don’t require new legislation, they simply require a willingness on the part of public bodies to engage with the technology providers on solutions which can work for suppliers of any size. For example, we are already working with two NHS trusts, both keen to tackle the issue head-on, to enable their suppliers to be paid instantly.
In this regard, we are very pleased that the government is opening up a call for evidence on these issues, and we look forward to discussing how smart technology can play a role in, once and for all, ending the problems of slow payments.
Now that public sector organisations are aware of the scale of the problem and the technological tools exist in the private sector, there’s only one thing to do: collaborate. By bringing the two sectors together, we can have instant payments for all suppliers, setting a new standard for the world to follow.