BACs Payment Schemes reveal late payments for distribution SMEs

Research by Bacs Payment Schemes Limited (Bacs), the organisation behind Direct Debit and Bacs Direct Credit, has revealed that distribution SMEs have to wait an average of 33.3 days longer than their original agreed payment terms, before invoices are paid.

This is an increase of 2.7 days on the time distribution SMEs were waiting, beyond agreed deadlines, in June of 2009 (30.6 days), and is contributing to considerable cash flow issues for many of them.

Michael Chambers, managing director of Bacs, said: "Small businesses rely on receiving payments on time so that they can maintain cash flow and ensure the business can run on a day-to-day basis. Our research highlights the continued widespread nature and real impact of the late payment problem, which was affecting 204,000 distribution SMEs in December last year."

Bacs’ research shows that large companies are the main late payments culprits, with 55% of distribution SMEs citing them as the worst offenders. However, 10% of respondents pointed the finger at fellow SMEs with a further 10% blaming sole traders. 11% of distribution SMEs cited not-for-profit organisations and government as the worst payers, suggesting that the pledge made in the 2010 Budget, that government departments will pay 80% of invoices within five days rather than the usual 30, will be a challenge to meet.

Cash flow remains the most common reason for overdue payments, with 33% of distribution SMEs saying it was the main reason given by customers for paying late (down 2% on June 2009). 12% of distribution SMEs said their customers blamed the economic downturn for payments being late (up from 1% in June 2009) and a further 12% said that being paid late had a knock on affect on their ability to make their own payments. 11% of respondents were told by customers that they had simple forgotten about the invoice, while 8% were given the reason that ‘the cheque is in the post’, an excuse soon to be obsolete with the UK Payments Council’s plans to phase cheques out by 2018.

Chambers said: "SMEs need to be proactive in improving their payment collection processes. Accurate, efficient and prompt invoicing, which clearly states the agreed payment terms, is a must. 86% of British SMEs received cheques as payment and 84% make payments by cheque, and with cheques soon to be a thing of the past, businesses should be encouraging payment direct into bank accounts, using payment mechanisms such as Bacs Direct Credit."

Although a huge number of SMEs are experiencing late payment of invoices, Bacs’ research reveals some encouraging signs of change, with the number of distribution SMEs affected falling from 216,000 in June 2009 to 204,000 in December 2009. The total amount owed to distribution SMEs also decreased from £9.5 billion in June 2009 to £2.9 billion in December 2009, with the average amount owed falling a huge £30,000 from £44,000 in June 2009 to £14,000 in December 2009.

Phil McCabe, spokesperson for the Forum of Private Business (FPB), said: "Late payment is a huge problem for small businesses and it’s highly disappointing to hear that small firms are having to wait even longer to be paid.

"Late payment is frequently cited as the number one problem facing our members, eclipsing even taxation and regulation. With its damaging impact on a company’s cashflow, it can cause a perfectly viable and successful firm to fold."

McCabe added: "We welcome Bacs’ work to highlight this problem and hope it will increase the pressure on late payers to change their ways."

Key late payment statistics for the distribution sector, December 2009:

33.3 days – the average time beyond the agreed payment date that distribution SMEs have to wait until they are paid, up 2.7 days on June 2009. The distribution sector is however fairing better than its service sector counterparts where SMEs are waiting an average of 50.2 days beyond agreed deadlines for payments (up 15.6 days on June 2009). The manufacturing sector fairs best waiting just 26.9 days (up from 25.1 days on June 2009).

204,000 – the number of distribution SMEs impacted by late payments in December 2009

£2.9 billion – the total amount owing to distribution SMEs at any one time in late payments

£14,000 – the average amount each distsribution SME is owed in late payments at any one time (down a huge £30,000 from £44,000 in June 2009), lower than SMEs in the service and manufacturing sector (£29,000 and £24,000 respectively)

33% – stated cash flow as the main reason given for late payment (down from 35% in June 2009)

12% – blamed the economic downturn for late payments (up from 1% in June 2009) the highest proportion of all three (distribution, manufacturing and service) researched sectors

8% – said the cheque is in the post (down from 10% in June 2009)

55% – stated larger companies are the biggest culprits of late payments owed to them

10% – cited sole traders as being the worst late payment offenders

10% – cited SMEs as being the worst late payment offenders

11% – of respondents cited the government and not-for-profit organisations as responsible for late payments

53% – the number of distribution SMEs that have experienced an issue with late payments, down from 63% in June 2009