Prompt Payment Code offers more help to SMEs
This month, new changes to the Prompt Payment Code came into effect. First announced in January, the changes are designed to strengthen the position of SMEs when it comes to being paid on time.
Late payments are one of the toughest problems small and medium-sized businesses face. Waiting 60, 120 or even 180 days to be paid for completed work makes it difficult to balance the books. This affects paying wages, running day-to-day operations and investing in your growth plans. During the pandemic, businesses of every size have experienced even longer and harsher payment terms.
As of July 2021, all companies signed up to the Prompt Payment Code must pay 95% of invoices issued to them by SMEs that have fewer than 50 employees within 30 days. For SMEs that have more employees, companies have 60 days to pay 95% of their invoices.
Let’s take a look at what the Prompt Payment Code is and why it’s so beneficial to the country's SMEs.
The Prompt Payment Code (PPC) was established in December 2008 to improve payment behaviours. There are now over 3,300 signatories who have committed to setting better standards in their payment practices. It helps SMEs get paid sooner so they can get on with running their business instead of worrying about late payments.
The original Code committed its signatories to paying 95% of their invoices within 60 days. The updated terms have halved this for SMEs which will hopefully give them peace of mind and stronger cash flow.
CEOs or Finance Directors of large companies must now personally sign the Code to indicate that they’re reliable customers. Companies that don’t keep up with their commitments are removed. They can only be reinstated when the PPC’s Compliance Board approves their improved plans to commit to the Code.
Companies that have signed the Code now have to recognise their creditors’ rights to charge additional fees like late payment interest. To avoid this situation, signatories will either need to pay on time or provide a valid reason for late payment. They must also give all of their creditors a named contact to answer any payment queries.
Signatories from small and medium-sized businesses now have to report annually on how well they’ve kept to their payment commitments. This is on a ‘comply or explain’ basis, so there’s added incentive to maintain their standards. The long-term hope is of course for as many businesses as possible to sign up to the code, and ultimately to improve payment culture.
There are around 6 million SMEs in the UK generating about half of the country’s business turnover. Their collective impact on the economy is huge and yet they’re regularly let down by slow and late paying debtors.
The Federation of Small Businesses (FSB) reported that around 50,000 SMEs close every year as a result of late payments. The impact on working capital affects not only the day-to-day running of the business, but also innovation, job creation and growth. It might be a worn out saying, but it’s repeated for a reason: cash really is king.
Research by Open Banking payments app tomato pay found that late payments affect 94% of businesses. According to their research, 32% of business owners pay themselves late or don’t pay themselves at all as a result. On top of that, 15% end up having to pay employees late too. The app simplifies the payments process for businesses (or sole traders) and their debtors so they can receive cash instantly.
When it comes to running a small business, reliable customers can be the difference between success and failure. You can check who has signed the PPC here to make informed decisions about who you choose to work with.
Although 30 days is a vast improvement on the months many businesses have to wait, it’s still a long time when you have your own bills to pay. If you need additional financial support to focus on investing in your business then invoice finance may be the perfect solution. It allows you to access the cash tied up in your invoices before your debtors pay. Head to our website to see what options are available.