50,000 businesses doomed to death due to late payments – is technology our saviour?

Emma Sjölund

A majority of small businesses are paid late by big businesses –  late payments have a clear impact on economic performance – equality is brought in the form of an automated marketplace.


Envision a UK based company with an annual turnover of £500k. Every day, the company gets inquiries and new leads. The business is booming. Yet, the company has reached a point where it just cannot respond to this demand.

"If all businesses would pay on time, 50,000 more businesses could have remained open.”

The company’s bigger clients pay their invoices 6 to 8 weeks late, and as the company doesn’t want to stir things up by charging interest for overdue invoices, the late payments affect severely the company’s cash flow.

This is the reality that tens of thousands of UK companies face everyday. 

Image source: FSB late payment survey 2016

Image source: FSB late payment survey 2016

According to the Federation of Small Businesses’s (FSB) recent report, 61% of small businesses are paid late by big businesses. Late payments are understandable, but at the same time very unfortunate.

Furthermore,
if all businesses would pay on time, 50,000 more businesses could have remained open in 2014.

A vicious cycle - impact of late payments

Poor payment practice has several economic effects on small businesses. FSB’s report indicates that late payments have a clear impact on productivity, growth, and economic performance.

The impact of late payments

Image source: FSB late payment survey 2016

Image source: FSB late payment survey 2016

Unfortunately, it doesn’t stop there. Higher levels of late payment lead to a greater exit or death rate for firms. 

"Higher levels of late payment lead to a greater exit or death rate for firms.”

Additionally, late payments to small businesses create further instances of late payment. Once the business faces cash flow difficulties due to late payments, it makes the business itself late to pay their own suppliers – and a vicious cycle is born.

Ending late payments contributes to profit growth

Ending late payments could significantly reduce business failures in the UK. 

According to the estimates of FSB, if the UK had a similar payment delay ratio to Germany, there would be approximately 25,000 fewer business deaths per year. In a case where all payments were paid on time, a whopping 50,000 companies would have stayed in business in 2014.

Image source: FSB late payment survey 2016

Image source: FSB late payment survey 2016

Additionally, small businesses would increase their profits significantly. If all payments were paid on time in 2016, small business’s profit growth would be 2.6 percentage points higher. This, in turn, would reflect higher levels of turnover and reduced costs, such as overdraft or loan charges.

"If all payments were paid on time, small business’s profit growth would be 2.6 percentage points higher.”

Despite the economic growth the UK would face by tackling late payments, the Government has failed to provide a viable solution.

Existing UK and EU legislation has simply been ineffective. For example, the EU Late Payment Directive has had a positive effect in only 20 % of UK companies. Being given the right to penalise companies for late payment is not an effective solution, as business relationships could be damaged.

Equality is brought in the form of an automated marketplace

The role of technology grows continuously. As the Government still lacks in proposing any feasible solutions, a huge amount of innovation has taken place to help small businesses with late payments.

"AREX is an automated Nordic marketplace with a simple solution for SMBs to conquer cash flow issues.”

AREX’s mission is to provide equality and liberation to small and medium-sized businesses. AREX is a live, automated, and fully transparent Nordic marketplace with a simple solution for SMBs to conquer cash flow issues. It allows turning receivables into cash instantly. 

For repayment, AREX gives businesses significantly more extra days on top of the receivables due date.

AREX launches in the UK early 2017. 

 

Author

Emma Sjölund

Content Marketing

The author is an advocate of clear communication and gets excited about automation, optimisation, and growth.