The Economic Cost of Late Payments
What a headline! 2 and half weeks of time chasing payments……. Imagine what that does to team morale!
The Government report on Late Payments Research, Estimating the total economic cost of late payments and their impact on the UK economy, commissioned by the Department of Trade and Industry has some scary statistics that sit alongside this headline.
14,000 Businesses close each year as a result of late payments – that’s 38 businesses each day! Late payments are estimated to cost the UK economy almost £11 billion a year!
The question is why, in this digital age of Ai and Automation is this even happening?
The report has an appendix that refers to the research completed by London Economics that uses methodological work completed on behalf of the DBT by academics at Aston Business School (Dr. Dalila Ribaudo and Dr. Muntasir Shami).
The primary causes for late payment are listed as follows:
Market Structure
In markets where dominant buyers hold significant bargaining power, they may exploit their position by demanding extended credit from suppliers. This behaviour is prevalent in markets with competitive supply chains, allowing buyers to dictate credit terms and pay late without fearing a supply loss. Bargaining power may result in longer credit periods, invoice discounts, and high delivery standards, especially in industries like construction and IT provision.
Poor Business and Credit Management Practices
Late payment can also result from inadequate business and credit management. Disputes over product or service quality may lead customers to withhold payments until satisfied. Effective credit management involves establishing clear credit terms, limits, and periods before a transaction. It also requires credit checks on customers to assess their financial health and resolve disputes promptly.
Financial Distress and Economic Climate
Businesses facing financial difficulties, often due to technology changes, management errors, or inefficiencies, may prioritize creditors differently during financial struggles. In times of economic downturns, late payments and business failures may increase. Overtrading in growth phases can also lead small businesses to become late payers.
Let’s take a look at some of these causes:
Market Structure
Dominant buyers are the main problem here, particularly in the construction and IT industries. There was a time where supermarkets were also guilty of this bargaining trait and exploited farmers and producers paying way below market rate in return for substantial and exclusive contracts. The Government Code Adjudicator got involved, along with DEFRFA and launched consultations to address this contractual unfairness and campaigns like Get Fair About Farming are pushing for amendments to GSCOP to ensure supermarkets buy what they commit to, pay agreed prices, and pay on time.
Of course, this is just one industry amongst hundreds but it shows that there is scope to legislate and improve. The Fair Payment Code was launched in late 2024 to tackle the widespread issue of late payments to small and medium-sized enterprises (SMEs). Businesses can earn gold, silver or bronze awards based on how promptly they invoices.
Transparency and Reporting Requirements for large companies to report payment performance in their annual reports, includes;
- Total payments made
- Percentage paid within agreed terms
- Any delays or disputes
This public reporting increases board-level accountability and allows suppliers to assess payment reliability. Non-compliant companies may face fines or criminal prosecution, especially if they fail to report payment practices.
Poor Business and Credit Management Practices
Lack of visibility of invoices and processes and manual processing lead to inefficient workflows that cause delays in payment. This lack of visibility causes problems with real-time cash flow. Not having an up-to-date view of liabilities and cash reserves means that payments are often delayed or unplanned causing liquidity issues. Add to this poor credit management with unclear credit terms and disputes over service can disrupt payments and lead to plate payment reporting.
Mitigate these problems with automation solutions that enable e-invoicing, streamlined workflows, real-time reporting on with up to the minute data analytics, and supplier portals.
The Fair Payment Code is designed to empower SMEs not to fall victim late payments. Understanding the implications of this code can help SMEs choose who they supply and on what terms. By rewarding businesses that pay promptly and requiring large companies to report their payment practices publicly, it empowers SMEs to make informed decisions about who they work with and under what terms.
Yet legislation alone is not enough. To truly solve the late payment crisis, businesses must take ownership of their internal processes. That means embracing automation—not just as a tech upgrade, but as a strategic imperative.
AP automation solutions are designed to tackle the root causes of late payments. From e- invoicing and streamlined approval workflows to real-time reporting and supplier portals, their tools give businesses the visibility, control, and efficiency they need to pay on time.
If you’d like more information on how Documation’s solutions can help your team become a Fair Payment Gold Award holder get in touch!
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