Risky business: the late payments scandal putting Scots SMEs at risk

If you haven’t booked up already, then you probably have at least started pondering where to spend your break this summer. Depending on your circumstances, it’s a chance to spend time with the family, go exploring, unwind and generally disengage from the daily grind of work.

That is, of course, unless you are one of the more than 700,000 people in Scotland who are self-employed, or own your own small business.

Some research has suggested that nearly half of the people who fall into this category only take one or two weeks off each year because they are too worried about payments to allow themselves time away from business. One out of 10 claim they have no vacation at all. And as it happens, summer is reportedly the worst time for getting paid.

Seven-day demand letters, billing periods and the general misery of trying to collect money that you are legitimately owed and long overdue might seem an odd topic for a chat with a stranger if you happen to get into conversation with someone on a train. But then again, it’s a growing area of common ground as the ranks of the self-employed and small business owners swell.

It’s been described as the late payment “crisis”, which is something of a misrepresentation as the definition of a crisis is “a crucial stage or turning point”, implying that the events in question are of a defined and limited time frame.

Late payments are an everyday reality, and have been since the dawn of capitalism.

But despite years of talk about the need to curb payment abuse and level the playing field between smaller suppliers and large contractors, the problem has been getting worse, with little concrete action for improvement.

The individual and economic impact of this is massive, and undoubtedly plays a major role in the UK’s failure to crack the puzzle of poor productivity.

Retail payments authority Pay.UK issued figures earlier this year which reflect the scale of the problem, with the balance of outstanding late payments to small firms doubling to £23.4 billion in 2019.

The majority of SMEs that raised new financing in the final quarter of 2019 did so to manage their cash flow, rather than invest in growing their business: fewer than one in four used the money to update equipment, just 16% invested in expansion, and a mere 2% spent the money on recruitment.

When someone is not paid what they are owed, they lose the ability to choose how they spend their money. The effects of this then ripple out more widely as they, in turn, struggle to pay their own suppliers, partners and employees – and, of course, the tax man.

An estimated 50,000 businesses fail each year in the UK because of cash flow issues, but for those that survive, there are other consequences: damaged business relationships, additional late fees, and impaired credit ratings that make it difficult to access funding in the future.

There is also lost time that could be spent more effectively on other tasks. Recent research from digital banking platform Tide found that the average UK SME is chasing five outstanding invoices at any one time, draining away 1.5 hours of every working day.

SMEs in London were said to have the toughest time, with an average of two hours a day spent chasing seven overdue invoices. This was closely followed by Scotland, where firms are spending 1.25 hours per day pursuing six outstanding bills.

Imagine going for your weekly shop and then telling them at the till that you’ll pay for your food in 100 days. Well, that’s effectively what’s happening as large organisations use their suppliers as a free line of credit to prop up their own businesses.

Let’s be clear: when we talk about “small” businesses, we’re actually referring to most businesses. Scotland’s 354,125 SMEs account for 99.3% of all private-sector firms, employing an estimated 1.2 million people. That’s a huge chunk of our economic base to have hamstrung by late payments.

Employers’ organisations such as the Federation of Small Businesses, the construction sector’s SEC Group, the Association of Accounting Technicians and others have campaigned long and hard on this issue. As part of that effort, they have recently started attempting to take a measure of the human cost of late payments.

According to a survey at the end of last year by the Electrical Contractors’ Association (ECA) and the Building Engineering Services Association (BESA), nine out of 10 small business owners in the construction sector have suffered mental health issues from the strain of late payments.

Pay.UK found that 26% of SME business owners across all sectors stress about late payments, even when they

are not at work. A further 17% said payment delays undermine their own confidence in their ability to run a business, and 16% said they worry about the issue every day.

There have been some reforms by the Scottish and UK Governments to tackle the late payment culture, but’s it clear that these have had limited success.

A further package of UK measures announced earlier this year under Theresa May’s government appears to have gotten lost amid the Conservative leadership contest, December’s election, and competing political priorities spawned by the UK’s departure from Europe.

The Scottish Government is currently in consultation about proposals to reform payment practices in the construction sector – a welcome development – but even if there are overhauls as a result, these won’t be of any help to the wider pool of SMEs.

Given the human and financial costs involved, it’s time to stop talking and start doing. Shifting the Prompt Payment Code from a voluntary initiative to a statutory requirement would be a definitive first step towards giving the people who run our vital SME sector a chance for a break in the sun.