Do payment practices make perfect?

The leaves are well and truly turning brown as we hurtle through the final quarter of 2024. And what a year it’s been, with considerable change, both politically and economically in the UK.

Business optimism saw an uptick over the summer, with further positive news this week as official figures show inflation has fallen to 1.7%, potentially paving the way for interest rate cuts next month. So, there are encouraging signs for the economy as we enter the final weeks of the year.

The government’s warning of a “painful” budget, however, may have dampened the spirits of the UK’s small and medium sized business community.

There has been much talk about Chancellor Rachel Reeves’ maiden budget, with speculation growing in recent days that a rise in employer National Insurance contributions is likely. According to some, this could result in a 1% – 2% rise in payroll bills for businesses.

Though its right to consider the options available, increasing the tax burden on SMEs would have longer-term implications on recruitment and pension contributions - not to mention investment levels - at a time when business owners are seeking policies to alleviate pressure, something reflected in our latest SME Confidence Tracker .

Tax policy reforms, improved access to finance for growth, and support for late payments are all high on the agenda. And, as SMEs wait with baited breath to understand the impact of this month’s budget, the government’s unveiling of new measures to tackle the latter may offer clues to its focus.

The perennial issue of late payment

The impact of late payment is unlikely to be news to anyone, least of all business owners. According to our research, more than two thirds of SME owners say customers are taking longer to settle invoices than a year ago. It’s an issue frequently cited among the key challenges facing businesses around the world.

Successive governments have attempted to reduce the impact of this issue, so it’s unsurprising this is an area of policy focus for PM, Keir Starmer’s team. On 19 September, the government announced a series of measures, including the requirement for larger firms to include detailed payment reports in their annual disclosure, as well as consultations on further measures regarding payment practices, and a new Fairer Payment Code, replacing its Prompt Payment predecessor. This follows the EU’s New Proposal for Late Payment Regulation announced in 2023, which revises what is more commonly known as the Late payment Directive.

All measures that improve outcomes for smaller businesses, should be supported. There may, however, be unintended consequences of tighter regulation surrounding late payment. After all, one business’s outstanding invoice is another’s short-term cashflow, no matter how big or small.

I believe a more nuanced debate on the subject is required. One that considers not only how to reduce payment days outstanding, but crucially how to inject greater liquidity into supply chains even faster than standard payment terms of 30 days (widely considered “prompt”).

As SMEs naturally look to negotiate more advantageous credit terms with customers, value within their outstanding invoices exists today. Why wait 30 days, when you don’t need to wait a week?

Better late than never

Another key aspect lost in the debate is bad debt. While late payment may hamper, bad debt wrecks. Two fifths of SMEs suffer from non-customer payment or protracted default, and worryingly our latest study shows it is on the rise. In total, UK SMEs wrote-off an average of almost ￡40,000 in the last 12 months, a staggering increase of ￡22,000 from ￡17,590 in the spring. Though often wrapped up in the debate surrounding late payment, it’s a distinct issue and one which requires distinct measures.

Whatever the outcome of the consultations announced, I look forward to seeing the government’s plans develop over the coming months. What is positive is to see payment practices and support for SMEs back at the top of the agenda, after a year largely dominated by politics.

For now, here’s to the first Autumn Budget under new leadership for 14 years. It’s one SMEs across the country will be keeping a very close eye on.