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Why SMEs need to learn the Carillion lesson

Shocking details about the payment culture at Carillion and other companies underline the need for SMEs to better protect themselves against late payment. Alternative finance can help.

The collapsed contractor Carillion has been accused of taking as long as 120 days to settle invoices despite being signed up to the Prompt Payment Code, which is meant to safeguard small businesses against such behaviour. Furthermore, research from e-procurement software supplier Wax Digital shows that late payment behaviour is far from confined to the likes of Carillion. According to the data, double standards are common; of the senior finance managers polled, almost two thirds said they had sacked customers over repeated late payment, while almost 70% admitted to being late payers themselves.

It isn’t surprising that SMEs are suffering. According to new figures from the Chartered Institute of Credit Management, more than a quarter of invoices are being paid late, severely affecting cashflow at small businesses. Insurers Zurich put the bill for late payment for SMEs at as much as £44.6 million, while the Federation of Small Businesses claims that if these businesses were paid on time, the national economy would get a £2.5 billion shot in the arm. It would also stop businesses going to the wall.

The National Federation of Builders has pointed the finger at the public sector. According to the Federation, late payment culture in the public sector, including central government, is putting small businesses at a great disadvantage – notably, it mentions payment terms of 120 days, with around £22 billion in annual turnover paid late.

The government has introduced new legislation to tackle late payment , which makes the act a criminal offence, but early analysis of its activities show the sheer scale of the task that it is facing. Tellingly, a group of MPs have announced that they will launch a parliamentary inquiry into whether the government is doing enough to support SMEs, in particular in relation to late payment, and whether the creation of the small business commissioner is helping. Such action sounds promising but small business owners have heard a lot of rhetoric and read about many initiatives; they’ve benefited from precious little action.

Alternative finance and in particular invoice finance can help. Invoice finance can help secure prompt payment of invoices without endangering important business relationships. Furthermore, other alternative finance services, such as peer-to-peer lending and crowdfunding, can raise capital to help maintain cashflow when it comes under pressure, such as if late payment is an issue.

The alternative finance sector has grown rapidly and awareness of the various facilities is growing. It is becoming increasingly clear that a proper understanding of how these services work is vital to successfully using them. This is how a company in West Sussex used a commercial finance broker in Worthing that specialises in alternative finance to raise £20,000 for new equipment.

The collapse of Carillion is a blow to the SME sector, but if it finally exposes the extent of late payment culture and prompts definitive action to tackle it, then some good will have come from the debacle. SMEs have to better protect themselves against this behaviour and alternative finance can form part of this protection.

To find out more about A&T Business Associates services, contact Tony on 01903 602211 or tony@atbusinessassociates.co.uk.

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