Xero insight: How technology is changing the late payments culture

Edward Berks is Director of Platform Business at Xero, leveraging Open Banking and PSD2 to realise the next generation of services for Xero customers. He is also passionate about enabling success for small businesses and brings first-hand experience of the challenges faced by entrepreneurs.

Late payment is one of the biggest issues facing small businesses today. Analysis from Xero’s Small Business Insights platform shows that over half of invoices issued by our small business subscribers are paid late, resulting in 54 per cent of these businesses starting the year in negative cash flow.

However, this is not just a business issue. With almost 6mn small businesses in the UK, we all either run a small business, work for a small business, or are close to someone who does. The impact of these late payments on physical and mental health is considerable, and it’s reaching a crisis.

According to research we conducted with PayPal recently, in the last 12 months, over half of small businesses have raided their personal savings or been forced to borrow from friends and family, to keep their business afloat.

The Government has made steps to level the playing field. This includes taking steps to ensure big businesses improve their payment practices. The office of the Small Business Commissioner was set up to look at late payments and there has been a consultation on whether to make a board director responsible for creating better payment practices. These are good ideas, but it’s clear there is still a problem.  

The scale of the issue

Xero’s Small Business Insights shows that the average British small business is owed £24,841 in late payments on any given day. This equates to 11 months’ average staff wages, or almost 10% of the average turnover of a small business, suggesting that the UK’s small business economy as a whole is burdened with £141bn of late payments.

In the days when invoices had to be physically passed between different departments, there might have been an excuse for this. But not anymore. The question company boards must ask themselves is: is it appropriate that they are using their small suppliers as a source of finance?

The impact

Poor cash flow can force small business owners to live invoice-to-invoice and spend their time chasing debtors, with no ability to plan and creating insecurity for employees and creditors. And due to late payments, it is estimated that some 50,000 small businesses fail each year due to cash-flow issues - according to data from the Federation of Small Businesses.  

Late payments can damage a firm’s credit score, making it increasingly harder to raise funds and in turn affecting the firm’s financial profile. Small firms already find accessing finance difficult, so having to deal with late payments only makes matters worse. According to research, 62 per cent of small businesses don’t think they could survive more than three months if their outstanding invoices were left unpaid.

Improving national productivity means helping companies to get access to finance and addressing late payments which tie up working capital and stifle innovation. These issues go right to the heart of the productivity debate in the UK today and ultimately have a knock on effect on the wider economy. 

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The solution 

Whilst changing the payment habits of your customers might not always be possible, small business owners can take simple steps to remove some of the barriers that create late payments. Be clear with clients about the importance of getting paid on time, so you can survive as a business - and pay other stakeholders. Terms are there for a reason, so consider implementing interest charges on late payers to try and break bad habits.

The good news is that there is a progressive awakening  as businesses create policies on the environment, diversity and responsible business. And the next to be added to this is payment culture. Businesses need to have a cultural mindset shift which prioritises paying bills on time.

It may sound obvious, but the easier it is to pay an individual or business, the quicker you’ll pay. Bringing a great billing and payments experience to your customers should be a high priority for every business - a difficult or technical process will only encourage those who owe to put off payment for longer. 

For those that already use cloud accounting software, you can add payment services directly to online invoices to give customers more ways to pay and see when it’s been opened and viewed, and send automated reminder notices. Data from Xero shows that invoices with a ‘Pay Now’ option, to take credit card payment with Stripe or to easily set up a Direct Debit with GoCardless, get paid typically in half the time of those that don’t.

Quicker, simpler payment has enormous value to any business, so it makes sense for accountants and bookkeepers to improve their client’s cash flow by using software and apps to tackle late payments. This will also give businesses and their advisors time back to focus on the things that matter - like building strong relationships and focusing on growth. 

Tackling the issue of late payments is vital in enabling small businesses to reach their full productive potential and improve not only the growth of their business, but the growth of the UK economy at this critical time.