SMEs are hitting back at partners who fail to pay them on time, with more than a fifth (22%) declining to do future business with customers who have paid late in the past.
New research from Barclays has shown that 85% of SMEs have experienced late payments over the last two years and that collectively SMEs are owed more than £36 billion in late payments, causing serious cash flow problems and putting their businesses in jeopardy.
Two thirds (66%) of respondents whose businesses have experienced late payment said on average they have had to wait more than a month past the agreed payment terms for a bill to be paid, while 11% said they have to wait more than six months.
Sue Hayes, managing director of Barclays Business banking, said: "Faced with a continually challenging business environment, small businesses clearly have no other option than to take action against customers who repeatedly pay late.
"While it goes against all natural business instincts to turn customers away, it is entirely understandable when weighed up against the overall impact of the late payment on the future of the business."
In October, Dragon's Den star Deborah Meaden told the Huffington Post UK the key mistake that start-up businesses make is underestimating how long it takes for customers to pay them.
"People underestimate the length of time it takes people to pay them; they'll think if I do the job on day one and I'll get the money off them on day 28 - and they underestimate the amount of cash the business will need," she said.
"Entrepreneurs are optimistic and believe everything will work out, but they consistently underestimate cash flow."
Separately, Zurich's SME Risk Index found 16% of British small and medium-sized businesses (SMEs) surveyed consider themselves at high risk of going out of business within the next year due to financial pressure. In addition, 82% are not confident the current economic climate improve in the next quarter.
Despite this, many SMEs are determined to expand to assist their growth. Richard Coleman, director of SMEs at Zurich, said: "A key factor in surviving and achieving growth is being able to strike a careful balance between taking necessary risks on the one hand, and then overcoming and preparing for risks on the other. Getting this balance right is not easy but we urge SMEs to plan accordingly and to seek advice where possible."
Case Study
One SME owner has had enough, and has changed the way his business operates to stop cashflow problems hitting his business.
Atul Bhakta joined export and import courier One World Express as managing director in 1998. Despite the business going from strength to strength since it started up, they have been constantly hit by late payers.
Bhakta said the problem got worse in 2009 and 2010 though, as the recession really started to bite.
"The business was being hit by repeat customers who regularly paid late, and we knew it was something we had to tackle head on," he said.
"Some customers were essentially using us as a bank, putting a terrible strain on our cash flow. This resulted in us not being able to pay our suppliers, and going deeper and deeper into our overdrafts.
"Our suppliers are our lifeline, and failing to pay them would result in the business being in significant trouble. It was this danger that resulted in us making the challenging decision to implement a very strict policy on late payments."
Customers stretched payment terms as much as they could, some customers even took 60 days. And it wasn't just the little customers - big players were taking their time too.
To tackle the issue, Bhakta decided to put late paying customers accounts on a 'stop' to prevent further shipments, and asked customers with foreign accounts for payment upfront, or for a deposit. And in extreme cases they have declined business from customers who have regularly paid late in the past.
"We don't have the man power or the energy to continue to trade with customers that fail to pay on time. This was a hard decision to make – but a positive one. While it does affect the business in the short-term, in the long-term this strict policy has made the business more stable and meant we have gone out to find the business that we want."
Another SME taking matters into their own hands are Darlington-based CFG Finishers, contract spray finishers to the joinery industry and suppliers of specialist coatings.
Owner Scott Murgatroyd has been a constant victim of late payment and has suffered thousands of pounds worth of bad debt, forcing him into his overdraft and even taking out another loan to cover the bad debt."
"Late payments mean you can't move forward, you can't progress – we want to do more marketing but it’s difficult to pay for this when you have to cover other areas of the business due to bad debt," he said.
After sending out solicitors' letters - at a cost to his business - he has decided to tackle the problem by setting up an ecommerce website, which forces customers to pay for his firm's work before they exit the site.
"The site supplies paint finishes and sundries, such as brushes and rollers. Small businesses like ours have to diversify to stay alive."