Why prompt payment is an economic necessity

6th February, 2024

Written by Liz Barclay, UK Small Business Commissioner

Paying your suppliers quickly could help stem the flow of small business failures as the cost of doing business reaches a critical juncture.

Companies have a responsibility to pay their small business suppliers quickly regardless of the payment terms – or risk a reputational backlash as the cost of doing business puts hundreds of thousands of organisations at risk.

However, prompt payment of invoices could be the difference between life and death for small businesses. If you’re a big customer and you owe money to a small business, then you need to pay it now. Not in two weeks’ time, not in 30 days’ time, not in 60 days’ time because the small business may not be there.

The talent that is driving your business success sits to a large degree with those freelancers, sole traders, micro businesses and small businesses. You’re shooting yourself in the foot if you haven’t paid their invoices on time.

The prompt payment of invoices should fall under the environmental, social and governance banner and that the broader ramifications of failing to pay promptly could come back to haunt companies as customers and employees vote with their feet. That is why we are so pleased that the Good Business Charter includes prompt payment to suppliers as one of its ten minimum standards to achieve accreditation, putting it on a par with other ESG issues such as treatment of employees, the planet and approach to tax.  I hope increased awareness of the Good Business Charter during this Good Business Week helps amplify our message of how important prompt payment is.

The way you treat your small suppliers is indicative of how you treat your employees and it’s indicative of your reputation within the community. Boards keep saying it’s an operational issue, but it’s actually a strategic issue and a reputational issue. How does it sit with investors, as they look at your payment terms? How does it sit with those skilled workers that you’re desperate to recruit?

We need boards to be taking that seriously and saying to their CFOs and their CEOs: ‘how quickly do we pay our suppliers?’ We have got to keep those suppliers afloat, otherwise they will simply disappear.

Cash-flow issues are a thorn in the side for the UK’s smallest companies, as the combination of economic factors and rising costs including inflation, energy bills and wages have created a cost of doing business crisis.

If you haven’t got the cash flow that allows you certainty, you’re not going to invest in jobs, in training. You don’t do anything but hope to survive. There’s a credit crunch and small businesses are not able to borrow. How do you tide yourself over?

Bad payers need to understand the consequences of their actions – and those consequences are likely to be more serious in the current economic climate. However, some companies are also extending their payment terms, which is exerting disproportionate cash-flow pressure on their small suppliers.

Often it is these extended payment terms rather than late payments per se that cause an issue. Sometimes a small supplier will agree to extended payment terms without even realising. It’s only when they feel they’re waiting for an inordinately long period of time to get paid that they discover they’ve signed up to be paid in 120 days.

My advice for smaller businesses is to give themselves the best possible chance to get paid as quickly as possible by being clear on payment terms before they accept work, ensuring that invoices contain all the information needed to be processed and by forging relationships with those responsible for payment within the organisation that they’re working with.

Legislation to speed up the payment process is not coming any time soon and we have to work with the tools we’ve got.

Visit our website to for advice and guidance on how avoid delayed payments.