Research reveals long payment problems for SMEs with one in six invoices paid late
A new index has been released providing insights into the payment terms of small businesses, including sole traders, and the prevalence of late payments across different sectors.
The study by challenger bank Tide commissioned YouGov to conduct the research, engaging with 573 senior decision-makers in small businesses.
According to the findings, the average payment term for sole traders and small businesses is 15 days. However, approximately one in every six (16 per cent) of invoices are paid late, notes Tide.
Interestingly, when late payments do occur, Tide calculated that this adds, on average, another 15 days to the initial period, bringing the total up to 30 days.
Of those surveyed, an overwhelming 89 per cent confirmed that they have some form of payment terms in place. Of that, nearly one third (30 per cent) have payment terms of 30 days after completion, and more than a third (36 per cent) are waiting over 30 days for payment after completion.
17 per cent of SMEs and sole traders are securing at least a proportion of payment prior to starting work while a lucky third (33 per cent) report never experiencing late payments.
Examining individual sectors, retail is the top performer, according to the study, with just 11 per cent of invoices paid late. Construction, on the other hand, has longer payment terms and experiences more than double the amount of late payments to that of retail.
Ranking near the bottom for late payments is the manufacturing sector. Despite having one the longest payment terms across the sectors, almost one in five (19.8 per cent) of invoices are paid late, taking an average of just under 35 days after completion of work to be paid.
The research suggests that giving generous credit terms does not improve an SME’s chances of getting paid on time.
Sarah Young, VP of Member Engagement at Tide, commented: “Late payments are a blight on businesses, and the problem often becomes a cascade of extended credit. Perhaps the biggest takeaway from this research is that giving generous credit terms does not improve your credit control. In fact, it mostly has an inverse relationship; the longer your credit period, the bigger the payment delays, and the longer you wait to get paid.”
The problems of late payments for small businesses have recently been raised by the government, which has acknowledged the impact it can have on the cash flow of SMEs and sole traders. According to the government, there is currently £23.4 billion worth of late invoices owed to small businesses across Britain.
In response, a range of proposals has been put forward to give the Small Business Commissioner more powers to help small firms tackle late payments.
“It’s not always easy to change your credit terms, but you can certainly reassess what you’re doing and consider if it is good for your business and good for your customers,” continued Young.
“You may not be able to change all your credit agreements overnight, but you can certainly make gradual changes to improve your cash flow and the security of your business.”
See payment term index below (Ordered by rank for actual* payment terms (average payment terms + average late time):
| Industry | Average standard terms (Days) | Average late payment duration (Days) | Actual average duration until invoice payment (Days) | Average percentage of invoices paid late (%) |
|---|---|---|---|---|
| Retail | 7.67 | 4.27 | 11.94 | 11.06 |
| Construction | 14.03 | 12.42 | 26.45 | 22.69 |
| Finance and Accounting | 16.53 | 11.22 | 27.75 | 17.80 |
| Other | 18.90 | 9.49 | 28.39 | 14.40 |
| Media/ marketing/ advertising/ PR & sales | 21.97 | 12.04 | 34.01 | 19.23 |
| Manufacturing | 22.51 | 12.36 | 34.87 | 19.81 |
| IT & telecoms | 23.31 | 12.25 | 35.56 | 20.23 |
