Protect small business from late payments with ‘traffic light system’

Small businesses need a warning system to help avoid the “devastating” effect of long waits for payment, after new research shows almost two-thirds of large companies take at least a month to pay their bills.

Paul Uppal, the Small Business Commissioner, is to recommend the use of a “traffic light warning system” that will alert small firms to the potential of longer payment terms.

The call follows new data that found 65 per cent of UK large businesses have an average bill payment time of more than 30 days, while more than a fifth (21 per cent) of these reported an average of 50 days or longer.

Firms that take more than 30 days to pay are “in effect, using their supply chain to finance their businesses” and halting the ability of smaller businesses to grow, according to the study.

It found that invoices take an average of 37 days to be paid to small firms in Scotland, in line with the UK-wide average, but well above the commissioner’s recommended exemplar of 30 days.

Uppal said: “The effect of late payment on Scottish small firms can be devastating. It impedes business growth, but also has an impact on the lives and mental health of those running small firms.

“Our initial findings indicate that almost two-thirds of payments are likely to be owed to smaller firms [across the UK] at any time.

“This is money that could be used to grow smaller businesses and generate tangible economic activity. Instead it is stuck on large firms’ business ledgers doing nothing.

“A traffic light system would be a simple and effective way of demonstrating which larger firms have structured their supply chain in such a way that it is more than an exchange of good or services but also resembles part of their financing model.”

Companies in London are the most prompt with payments, taking 34 days, while firms in Yorkshire and the Humber have the worst payment record in the UK at an average of 43 days, the study said.

The research used public data from 7,010 firms, under legislation imposed in April 2017 which requires all large businesses to publish their payment practices.

Uppal added: “The challenge now is to use the information to help small firms make sound decisions based on transparent information before deciding which larger businesses they should trade with.”

Ed Thurman, MD of global transaction banking at Lloyds Bank Commercial Banking, said: “For some businesses two weeks can be critical in the financial wellbeing of a smaller businesses.

“Businesses could consider utilising invoice financing products to mitigate these challenges.”

The office of the Small Business Commissioner was launched in December 2017 to help ensure fair payment practices for Britain’s small businesses.