“Cashflow is the lifeblood of any business,” comments Donald Kerr of Lloyds Bank, “but for too many businesses, late payments continue to be a significant problem.” Lloyds recently published their Business in Britain report, which found that almost 20% of businesses have problems with their cashflow, the majority of them identifying late payment as a significant issue.
Lloyds’ study found a strong level of confidence in business overall, standing at 43%, but that late or slow payment remains a serious exception. This is especially true among SMEs, who often don’t have the muscle to do anything about it, particularly if the debtor is a larger business, but it affects everyone.
Out of the 1500 companies Lloyds included in their survey, 31% expected more customers to be requesting deferred payment terms over the next six months. By contrast, only 7% of the companies expected the number to fall.
The Invoice Finance Problem
One of the main strategies for easing cashflow problems is invoice finance, which allows a company to unlock the potential cashflow in unpaid invoices. Invoice financiers, who can be either independent or part of a bank or other financial institution, offer two forms of deal: factoring (where they buy and manage the invoice) or invoice discounting (essentially a loan with the invoice as security).
Although invoice finance has some drawbacks, it’s a valuable option in the right circumstances. However, many businesses have been blocked from accessing it by a common anti-subcontracting clause in contracts. This is intended to prevent the subcontracting of the actual work, but under current legislation it has the unfortunate side-effect of also applying to invoice financing.
New Government Measures
As CCR Magazine reports, late payments to small businesses are estimated at £26bn, and business minister Anna Soubry has created a new position, small business commissioner, to address the power imbalance between large and small businesses.
New measures have also been announced under the Small Businesses, Enterprise and Employment Act 2015, and these will come into force early in 2016. Clauses restricting access to invoice financing will no longer be allowed, and a clause preventing sub-contracting must exclude this restriction.
Anna Soubry hopes that these measures will make it simpler for SMEs to ease their cashflow problems in the short term, and perhaps in the long run have more power to insist on prompt payment from their larger customers. “Small business are the economic backbone of Britain,” she says, “and we will do everything possible to make sure they continue to grow and create jobs.”
Only time will tell whether the current measures will be enough.
If you have cashflow problems due to unpaid invoices, contact me and I can advise you on your options.