Firms Continue to Accept Long Payment Terms

4th May 2018.

Companies around the world are taking longer to collect payments from customers, leading to a growing risk that they could hit trouble as the global economy slows.

UK businesses are currently caught up in a bitter struggle with late payers, where payment terms are persistently extended beyond the original agreement. Since the collapse of Carillion earlier this year, and the subsequent damage incurred to the supply chain, suppliers have demanded prompt payment from their customers. However, there has been a clear reluctance to change payment habits, and the business landscape will have to undergo a complete cultural shift to see results.

Research from trade credit insurer Euler Hermes has revealed that the number of days it takes for firms to pay its suppliers has grown by one-tenth since 2008 to 66 days. This is likely to increase again this year and illustrates the severity of the late payment problem in the country. Unfortunately, the solution does not merely lie with the perpetrators, as suppliers are also demonstrating timidity in collecting payment. The Small Business Commissioner, Paul Uppal for example, recently revealed the low number of complaints he has received from late payment victims since December. Many businesses are concerned that tightening discipline will hurt customer relations and are allowing payment terms to be extended and their financial strength weakened, as a result.

While sustaining goodwill between customer and supplier is important, this should not put prospects at risk. At the Credit Protection Association, our debt recovery services chase down unpaid invoices, and as we understand the importance of keeping positive relations, all our correspondence with the debtor is polite and courteous. We do however insist our members utilise our credit checking facilities to ensure these customers are worth keeping around.

Ludovic Subran, chief economist at the Euler Hermes, said the trend in long payment terms increases the risk of insolvencies: “This is one of the dark sides of the recovery. Companies are extending a lot of trust in the way that clients pay them — it is a loosening of discipline.”

He added: “The longer you wait, the more the risk that your clients hit trouble. When there is a cyclical downturn the companies with longer payment terms are those that get hit first.” One in four insolvencies, said Mr Subran, is because of non-payment from customers.

In the UK, where days sales outstanding is below average at 53, the government has pledged to tackle what it calls the “late payment culture”.

In his spring statement in March, chancellor Philip Hammond called for evidence “on how we can eliminate the continuing scourge of late payments — a key ask from small business.”

While embroiled in this bitter business landscape of skyrocketing business rates and stifling political uncertainty, losing a paying customer may seem like the biggest risk of all. However, this is not a route to prosperity, and bad payers can all too quickly descend into non-payers. If a business is struggling financially, extending payment terms can delay the inevitable risk of collapse. When Carillion collapsed, it left all its suppliers in the lurch. All those small businesses who had persistently allowed the construction giant to pay late were now having financial problems of their own.

This does not have to be an inevitable fate, and businesses of all sizes can take the right steps to stop customers from manipulating the rules. Despite the multitude of initiatives that the government has attempted, late payers are still reluctant to confess their mistakes, and suppliers shy away from confrontation. Until both sides agree to calm the bitter landscape, the late payment culture will continue. Luckily for businesses, there are third parties who can act as an intermediary and can get results on their behalf.

At the Credit Protection Association, our debt recovery services chase down unpaid invoices and recover the money that is owed to our members. Furthermore, our credit checking and credit reporting services ensure our members only work with firms that will propel rather than hinder their financial future. Until we see a change in the behaviour from both supplier and customer, credit management and debt collection companies will be around to pursue a positive conclusion.