Break the late payment cycle to help smaller suppliers build back better

Small businesses are the lifeblood of Britain’s economy; employing 61% of the private sector workforce – or 16.8 million individuals – and generating 52% of turnover. However, every year almost 50,000 small businesses go under because of cash flow problems.

Cash flow is complex. Whilst money tends to find its way out easily, it doesn’t necessarily come in when it’s needed the most. This is further compounded by a culture of late payments, which has been stifling our small business community for decades, but has reached an unbearable level for many in the last 18 months.

In the two years running up to the pandemic, payment practices among large businesses here in the UK were improving with average payment times beginning to fall. However, perhaps unsurprisingly, COVID-19 reversed this trend with the average time rising from 36.4 days to 37.4 days.

For many SMEs, long payment terms or late settlement means they need to find other ways to get vital working capital into their business. Often this results in them having to pay high levels of interest on loans to plug the gap until payment. One survey last year reported that one in seven SME owners had used their personal savings to keep their businesses going during the pandemic.

Slow payment not only results in small businesses having less cash reserves to invest back into themselves, but also means critical team time that should be spent on growth and development is instead wasted on chasing unpaid invoices. It puts small business leaders under stress and pressure, undermining the value of their entrepreneurial skills to our economy.

However, unlike the financial pressures generated by Brexit or COVID-19, late payment is something we can take control over and improve quickly. Now is the time for big firms to contribute to the economic recovery by supporting their small suppliers and paying them faster.

This simple action would deliver a much-needed economic boost for small businesses and in turn would have significant repercussions for the wider economy as we start to build back stronger. In fact, research we recently undertook with Cebr estimates that instant payments could unlock an extra £60bn in additional revenue for small businesses and create up to 460,000 extra jobs in the UK economy.

So, what can big businesses do to help?

In recent years we’ve seen attempts to create transparency in the supply chain and encourage the right corporate behaviours with the introduction of the Duty to Report and Prompt Payment Reporting. But good businesses don’t wait to be prompted or called out for poor practice.

Good businesses can support their smaller suppliers at no extra cost to them. The emergence of new technologies has made instant payment on receipt of invoice a reality. These systems enable big businesses to pay their small suppliers quicker, but also help them reduce their risks, increase efficiencies and save operational costs.

But we need far more firms to act. That’s why, with the support of the CBI, along with the FSB, Make UK, BCC, IoD and Creative Industries Federation, we launched the Good Business Pays campaign earlier this year.

Our mission is to encourage big businesses to not only fast-track payments, but to go one step further and re-evaluate their payment terms to ensure suppliers are being paid when they need it.

We believe claiming to pay “in line with contractual terms” simply isn’t enough –  especially when the original terms are bad for the small supplier. To end the problem of late payments and accelerate progress for smaller businesses, we have to make faster payments in 30 days or less an industry standard that both investors and customers expect from responsible businesses.

Good Business Pays is calling on large businesses to sign up and adopt a set of pledges, by committing to:

1. Complying with the Prompt Payment Code principles;
2. Exploring digital solutions that enable small supplier invoices to be paid when they need it;
3. Providing access to data that helps drive the fast invoice payment agenda for small businesses;
4. Making sure payment performance data is published as required by the 'duty to report' on large businesses;
5. Undertaking a quarterly review of feedback from suppliers on payment performance.

Since launching in May, we have already had major companies such as Mastercard sign-up, but to build real momentum we need your support.

Small businesses have shown incredible resilience in the face of COVID-19, with many playing a vital role to keep their communities going. We are calling on Britain’s biggest businesses to provide practical help to the small businesses that supply them by committing to the Good Business Pays principles and fast-tracking payment to help them thrive.

To pledge your support for the campaign and find out more about how faster payment could strengthen your organisation, visit goodbusinesspays.com.