Credit control and the modern SME

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9 March 2016

Billy MacInnesLate payment is a serious issue for many small businesses. According to the Ex-Post Evaluation of the Late Payment Directive study, published in November 2015, “three out of four companies in Europe have experienced late payments in the last three years, with SMEs likely to be disproportionately affected by this phenomenon”.

While I am grateful to First Capital Cashflow for drawing my attention to the quote in a press release headlined Can SMEs do more to protect themselves against late payment?, I have to say I was far from surprised by it. The press release contains a lot of information that merely serves to illustrate how entrenched the problem of late payment is. While most of the figures quoted by First Capital Cashflow are UK-centric, they could apply equally to other EU countries, including Ireland.

So, for example, UK SMEs spent £10.8 billion trying to recover overdue payments in 2015 compared to £8.2 billion in 2014. It also quotes a UK government report which stated that as of January 2015 “the overall level of late payment owed to small and medium-sized businesses is reported as standing at £32.4 billion, with the average amount owed to a small business at £32,000”.

Irish SMEs have the same problems. The latest ISME Credit Watch Survey reported that the average payment waiting time for SMEs in the fourth quarter of 2015 had increased to 60 days.

First Capital Cashflow also referred to Intrum Justitia’s European Payment Report 2015 which found that one-third of European companies would hire more employees if they were paid faster and a quarter believed there was a correlation between late payments and the need to lay off staff. Half of those surveyed said they had been asked to accept longer payment periods than they were comfortable with. In a sign of the high level of distrust that exists over late payment, 60% of respondents believed debtors were deliberately delaying payment.

The situation exists, of course, because smaller companies find it hard to enforce payment terms on larger ones, which is hardly surprising given the differences in power between them. First Capital Cashflow quotes the Ex-Post Evaluation Study as stating “tolerating late payment against the promise of future business is often a rational choice” but it’s a choice that “makes it very hard for policymakers to tackle late payment”.

I’m inclined to take issue with the argument that it’s a “rational choice” to tolerate late payment against the promise of future business given the effect late payment has on small companies. No rational person would agree to defer receiving payment if, as is argued above, it could lead to having to lay off staff or inhibit growth. Let’s be clear, that’s a choice made under coercion.

Sadly, the Late Payment Directive hasn’t succeeded in changing behaviours as the Ex-Post Evaluation Study acknowledges. “There is little evidence that the Directive has had an impact on payment behaviour and the practice of late payment to date,” says the report. It admits that “the main reason for failing to exercise their rights under the Directive is the fear, among creditor firms, of damaging good business relationships”.

The study also suggests that legislation is ineffective as a means of enforcing quicker payment. “Rather than legislation, national business culture, economic conditions and power imbalances are the driving factors for payment behaviour,” it states.

So what can be done to try and solve the problem? First Capital Cashflow believes it’s partly a question of confidence. It recommends that SMEs “implement swift reminders and charge interest on late payments where possible. By acting immediately, and with confidence, businesses may start to see a shift in the prevailing business culture resulting in long-term benefits”.

It sounds like good advice but how many SMEs have the confidence to charge interest for late payments if they think it could lose them business? Maybe it won’t, maybe standing up to the big boys will earn their respect and result in prompt payment, but who is willing to try it?

It’s a measure of how difficult that step is to take that the ISME Credit Watch Survey found only 1% of SMEs were charging late interest and only 4% of medium-sized businesses were doing it. But while it’s hard for small businesses to take a risk, the fact is that under the current system, they’re taking risks with their future all the time in a game that’s rigged in favour of late paying larger companies and organisations.

That risk may be mitigated if EU member states adopt one of the recommendations proposed in the Ex-Post Evaluation Study that there should be “automatic interest on late payment” because that would “remove the requirement for the creditor to take the initiative in exercising their right and provide an additional incentive for the debtor to pay promptly”. Let’s hope SMEs are not waiting too long.

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