Will Brexit make late payment worse for SMEs?

16/08/2016

Recent headlines have suggested a whole manner of repercussions that could arise from Brexit.

Already we’ve seen interest rates slashed to their lowest level in history, and there’s constant speculation over the likelihood of a potential recession, falls in housing prices and rising unemployment.

It’s therefore not surprising that late payment has entered the spotlight too. But, what impact will Brexit have on late payment – if any at all?

Long delays

Small businesses are now waiting an average of 71 days for invoices to be paid, according to the Asset Based Finance Association (ABFA). And the body representing the asset based finance industry in the UK has warned that Brexit could escalate the problem.

The ABFA says that with businesses facing uncertainty and questions about their future in the wake of the referendum result, ensuring suppliers are paid in a timely manner is unlikely to be a top priority.

Jeff Longhurst, chief executive of the ABFA, said: “There are concerns that big business will start hoarding cash as a response to the Brexit vote. One of the ways they normally do this is by delaying payments to suppliers.”

Increased risk

These concerns have been echoed by Boost Capital, who also warned that late payment risks will increase following Brexit.

Alex Littner, Managing Director of Boost Capital, said: “It’s unsurprising that late payment becomes a bigger issue than normal when a recession threatens.

“All the advice around ‘Cash being King’ comes into sharp focus as consumers become a little more cautious about what they spend and the cash flows into the tills a little slower.

“Businesses worry that their overdraft will get used up and that the bank will put the pressure on. So invoices stay on the to do pile rather than moving into to the paid drawer.”

Cash hoarding

This warning is unlikely to come as a surprise to many small businesses who are already feeling the pinch as a result customers hoarding their cash.

According to the new data from the ABFA, small businesses are waiting six weeks longer than big businesses for invoices to be paid. The 71 days they are being forced to wait on average compares to just 38 days for larger businesses.

Mr Longhurst said: “The impact of delayed payment on businesses’ cash flow and capacity to expand order books presents a serious concern – particularly for smaller companies. Even when a business is thriving, just a few unpaid invoices can end up a real threat to survival.”

So, what’s the solution?

As with much of the fallout from the referendum result, we’re still in a state of uncertainty and it could be some time before we know the extent of any negative repercussions.

However, if you’re worried about the impact Brexit and potentially increased late payment will have on your cash flow, there are a number of steps you can take to limit the damage.

Firstly, by adopting an efficient and effective credit control procedure you give your business the best possible chance of avoiding late payment. And, in the event that you do encounter late payment, a tough stance against it can be an effective way to get paid faster and deter such behaviour in the future.

However, unfortunately, many small businesses in particular struggle with this process as they feel the need to protect client relationships.

Mr Longhurst said: “The desire for repeat business means that many businesses are reluctant to charge clients interest, report ill-practice or to push back on suppliers imposing extended payment terms. This is particularly true for SMEs where the loss of one substantial account could be devastating.”

The alternatives?

Many businesses mitigate the delay in being paid by utilising invoice finance – a funding solution which allows a business to release money from invoices ahead of receiving payment from customers.

This bridges the cash flow gap between paying suppliers and getting paid and can even include sales ledger management and credit protection to further protect themselves from the threat of late payment.

Additionally, the government has attempted to tackle the issue through a series of initiatives including the Prompt Payment Code and the appointment of a small business commissioner.

But, with limited evidence to show these schemes are helping, ultimately the onus is on businesses to take the steps to protect themselves.

And, this is something that will become increasingly important if the risk of late payment escalates even further.

What do you think? Will Brexit impact late payment? Please share your thoughts in the comments below.