Invoice finance

Better late than never?

How the UK government is waking up to late payments.

Late payments have been an ongoing scourge for SMEs and the advent of digitisation has done little to fix this issue.

While finance providers may see a resulting uptick in invoice finance penetration, a lack of promptly-delivered income for SMEs can trigger default.

However, change may be on the horizon, at least through the engagement of the UK government in dealing with the issue. More than 10,000 businesses have been warned by the government that they must pay their suppliers on time or face being prevented from winning further government contracts.

Officials from the Cabinet Office have written to the businesses, which include all the government’s current strategic suppliers, to remind them of the new rules on prompt payment, which come into force from September 2019.

“Prompt payment is critical for all companies helping to deliver public services, particularly small businesses which are the backbone of our economy.”

Oliver Dowden, Minister for Implementation

Under the new rules, suppliers who bid for government contracts above £5m per annum and who cannot show they are paying 95% of invoices within 60 days risk being prevented from securing government contracts.

In an unusual move small business minister Paul Uppal made an example of high street retailer Holland & Barrett, noting their ‘shabby’ treatment of SMEs. Uppal observed that Holland & Barrett took an average of 68 days to pay its invoices and that 60% of invoices were not paid within agreed terms.

The government approach to SME late payments does not entirely come from a feeling of benevolence towards its citizens. The need to act followed controversy as government contractor Carillion collapsed at the beginning of 2018, and thus driving many innocent SMEs into bankruptcy.

One of the biggest victims was Hawk Plant Hire, which was dependent on prompt payment from Carillion to pay its lenders for its equipment leases. The independent plant hire group went into administration with the loss of 83 jobs, after being in operation for more than 40 years.

“The liquidation of Carillion in January 2018 has meant some timing disruption as contracts previously awarded have had to be rescheduled. Due to the high level of credit insurance in place on Carillion there will be a minimal write-off of balances outstanding at the time of liquidation.”

Hawk Plant financial statement

In addition a third of Carillion’s £1.5bn (€1.7bn) debt to banking partners was made up of “reverse factoring”, or supply chain finance facilities. Among major institutes, RBS, Barclays, HSBC, Lloyds and Santander UK were owed around 60% of the construction’s company debt.

With regulatory changes and the cause of late pavements being challenged by Uppal and minister for small business Kelly Tolhurst, it is hoped that a Carillion-style collapse (with the beleaguered Interserve the most likely successor) can be avoided. Delays in payments are intensely frustrating affairs, and any attempt to limit this issue is a welcome one for SMEs across the UK.