Linger longer: a guide to local and global late payments
They say these days we live in a global village. The ingredients in the food on your plate travelled thousands of miles from foreign shores, the car you drive is likely manufactured abroad. The clothes on your back from popular high street labels are probably made in China or India and the nice call centre assistant you spoke to last week might never even have been to the UK.
Conversely, you could buy classic British hair and skin products in an Australian supermarket or get authentic Yorkshire wool delivered to Japan. Global powerhouse PR companies use agencies local to the UK and American campers sleep in tents that are designed in Sheffield.
It’s great news for UK SMEs that the world is open for business. Especially as Brexit uncertainty encourages more owners to consider foreign markets beyond the EU. Expanding internationally can be game-changing; whether that means opening an office overseas or winning contracts with global clients.
“I’ve set up and operated several businesses across the world over the years. Doing business around the world is hectic and fascinating but is always different, in every country,” says Nick Hynes, CEO and Co-founder of digital agency Somo.
As with any major business decision, there are potential risks that come with every possible reward. Expanding internationally is no exception.“You need to go in with your eyes wide open,” cautions Nick. “It’s important to be aware that not every country is as commercial and secure as the UK.”
The way this instability can often manifest is through late payments. In other words, additional time taken to settle invoices, outside of those contractually agreed at the point of purchase. This is an unknown and unexpected element which can affect cash flow, business plans and even in some cases paying staff or suppliers.
“It can be like standing in a warm shower and suddenly being dunked in ice cold water, shocking and unexpected,” Nick explains. “It is important to be prepared for those inevitable financial shocks.”
Interested to see what payment practices are like outside the UK, we took a look at over 11,000 invoices issued to the UK’s top 10 trading partner countries. Namely: the United States, Germany, the Netherlands, France, Ireland, China, Switzerland, Belgium, Italy and Spain. We found that 43% of the invoices UK businesses issued to these countries were paid late in 2019. A whopping 13% more than were paid late the year before!
Picture the scene: a business – let’s call it a shampoo manufacturer for the sake of argument – ships £30,000 worth of products to a customer abroad. For ease of reference, let’s call our example business Fresh & Clean Ltd.
Fresh & Clean Ltd must now wait 45 days to get paid for the order, as per the agreed payment terms. During that time, the business still has bills to pay, supplier costs to cover, payroll to make on time plus the cost of manufacturing more shampoo for all their other orders. All the while remaining £30,000 out of pocket. This is what’s known as long payment.
Day 45 finally comes around but the payment doesn’t. Nor does the money arrive on day 46 or even day 50. In fact, according to our research, the average time Fresh & Clean Ltd could be kept waiting beyond agreed payment terms is 17.6 days. That also happens to be 2 days more than the business would have waited in 2018. A shining example of late payment.
So what does this mean for the team at Fresh & Clean Ltd? What difference does 18 days really make? If you consider that this might not be the only invoice the business is waiting on, the impact can be pretty huge. Supplier payments could be missed or orders for other customers delayed. That’s two types of business relationships already affected. Not to mention relationships with staff if wages are paid late or with creditors such as HMRC and Fresh & Clean Ltd’s landlord if their bills couldn’t be paid on time.
So which of the UK’s top 10 trading partners were the worst offenders last year? Our friends from across the pond. Overall, US debtors took an extra 51 days beyond agreed terms to pay invoices in 2019. Up from just 13 days in 2018! Second only to European countries, UK businesses send the largest invoices to the US; worth an average of £40,000. This is worrying when you consider that a staggering 53% of these invoices were paid late last year.
On the other side of the coin, EU countries seem to have come out as the best of this bad bunch. Switzerland for example, while still guilty of paying 37% of invoices late, only kept UK businesses waiting for around an extra week. This was followed by Italy with 9 days and joint runners up France and the Netherlands who exceeded agreed terms by a week and a half.
Here’s a closer look at the best, the worst and everyone in between:
Analysis conducted in February 2020 on 11,348 invoices sent abroad by UK SMEs between 2013 and 2019.
It is of course important to keep in mind that late payment practices aren’t reserved exclusively for international customers. In our analysis, we also looked at 100,000 invoices issued to debtors right here in the UK. Last year, local businesses paid 39% of their fellow countrymen’s invoices late – worth over £34 billion! Despite initiatives like the Prompt Payment Code and Duty To Report, the number of days an invoice was paid late in 2019 actually doubled to 23 days from 12 the year before.
Speaking on the topic of late payments in December 2019, our External Relations Director Bilal Mahmood said: “SMEs have come to expect long payment terms but late payments are inexcusable. For every day an invoice is late, it’s more time spent chasing payment. This means less time for owners to focus on growing their business, coming up with innovative ideas and hiring more people, or just paying their staff and bills. Things need to change quickly.”
“We want the UK to be the best place in the world to start and grow a business, but SMEs are hampered by overdue payments. Such unfair payment practices impact a business’ ability to invest in growth and have no place in an economy that works for everyone.”
Sure, late payments are a problem – one that we should all be working together to solve – but there’s no sense in getting bogged down by the doom and gloom. Running a business has never been easy but ambitious business leaders have always found ways to make it work. Although UK businesses are stepping into an as yet unknown post-Brexit future, there are no signs of this affecting their good old British bravery.
“These late payment insights will be valuable to UK businesses who are selling their goods or services abroad and to those businesses who intend to do so this year,” adds Bilal. “It will help them plan their cash flow and working capital needs. 2020 will be a pivotal year as the Government negotiates new trade deals globally. Business owners will be hoping for swift and favourable arrangements as they plan for growth and look for new markets to launch into.”
“In the meantime, there are ways for businesses to fight back against the negative impact of late payments, from having frank discussions with customers that continuously fail to adhere to agreed payment terms, to imposing sanctions on those customers, or seeking out invoice finance facilities to bridge the gap.”
Click here for more advice on how to get ahead of late payments using these three strategies:
- Knowing your customers
- Managing your accounting
- Making it easy for your customers to pay
MarketFinance provides ambitious business leaders with fast and flexible funding solutions that are transparent and easy to use. As the first fintech to seamlessly deliver invoice finance and business loans in a single facility, we’re here to help UK businesses grow.