A poor payment culture is sweeping the business world, causing major impediments in the operations of Small-to-Medium Enterprises (SMEs). Worryingly, despite the implementation of regulations to protect SMEs, such as the Late Payment Directive
, poor payment practices still prevail. Nonetheless, there have been recent attempts to minimise late payments to small businesses and provide additional protection to safeguard their future operations. UK Business Secretary, Greg Clark, has recently acknowledged the importance of the issue and he is attempting to enforce a viable solution. But what are the initiatives, if any, to aid SMEs outside of Europe?
The Late Payments Conundrum
Small businesses are dependent on robust cash flow, so when a large customer pays late, it can majorly disturb the operations of SMEs and, in many cases, lead to the closure of the small company. "
The late payment crisis in the UK is severe, leading to the closure of an estimated 50,000 businesses a year," - Federation of Small Businesses
(FSB). This figure is limited to the UK, with thousands of more SMEs, internationally, closing due to the breaching of agreed payment terms. The collapse of the business giant Carillion, once the second-largest construction services company in the UK, has paved the way forward for future initiatives in securing payments to SMEs. The big business was given 120-days or more payment terms which undermined the Prompt Payment Code
(PPC) entirely. The PPC requires paying invoices within 60 days unless there are 'exceptional circumstances' to increase the duration. Large organisations are often able to 'bully' SMEs into providing longer payment terms, indicating a desire for a revised PPC. For example, "54% of the companies polled in the Northern region of Europe report that they have been asked to accept longer payment terms than they feel comfortable with," - European Payment Report 2018
. The conundrum is whether to lose your largest clients or agree to their demands for extended terms. Carillion`s insolvency had only highlighted already valid problems with late payments. A practice is known as 'Phoenixing' has also been adopted by a minority of directors. Phoenixing is when directors intentionally elude debt by dissolving companies, only to then re-start a business of a similar nature, under a different name. Therefore, it is evident that directives are in need of improvements and governments need to crack down on laws for the protection of SMEs.
Recent Initiatives (UK & Europe)
Governments are slowly acknowledging the fundamental issues with late payments and are making great strides in minimising the problem. Mr Clark has been attempting to directly tackle schemes such as Phoenixing. Part of his idea involves an investigation into directors if they attempt to avoid paying the debt of a dissolved company. In addition, the UK government proposes to appoint Non-Executive Directors (NED) to oversee the supply chain practice. This transformation in boardroom culture will help to prohibit late payments, where, traditionally it was acceptable under the umbrella of 'helping cash-flow'. Oversight may well be the initiative needed for SMEs to safely conduct business and stay afloat. Additionally, the FSB has pushed the European Commission (EC) to 'up its fight' in order to end this culture of late payments. This may mean for a revised Late Payments Directive. Initiatives such as paying 90% of invoices from SMEs in the first five days or for SME`s to issue interest on invoices that are overdue are recommended tactics. The FSB is also calling for a strengthening in legal protection for small firms against lengthy payments.
Although much of the focus on assisting SMEs and reducing late payments centralise in the UK and Europe, there are additional regulators that provide aid in other regions. Dubai, for example, offers various techniques in order to eradicate the late payments culture. Contracts, under the protection of the Dubai International Financial Centre
(DIFC) and subject to DIFC Courts provide support to SMEs. Additionally, the Small Claims Tribunal (SCT) of the DIFC Courts deals with up to 90% of complaints
and settles them within an estimate of three weeks. They deal with claims from AED 100,000 and potentially to AED 500,000 if both parties agree. If your company has not been paid after four weeks of chasing payments then you are eligible and recommended to lodge a complaint with the DIFC Courts.
Research Before Risk
With the right precautions, it is possible to minimise risk and avoid chasing up late payments altogether. Cedar Rose
offers highly detailed credit reports
that not only show the financial history of a business but also provide a risk score to assess how risky a business arrangement with a company may be. The credit reports also include, if there are any, a complaints record against a business, in terms of payments. Therefore, with a bit of pre-emptive research, you can make sure that who you supply will be trustworthy and beneficial for the future of your SME. The Cedar Rose
credit report is an award-winning and bestselling product. Secure the success of your business arrangements and minimise risk with Cedar Rose. Follow us on LinkedIn
to hear news of a new initiative coming soon - which will we hope will make late payments a thing of the past.
Additionally, stay tuned in to our newsroom
where we will cover the latest trends and initiatives.
*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***