Late payment hits business

It Is Not always obvious in the small firms sector that the recession is over. Despite an economic upturn, late payment is still the worst problem facing most small businesses. A recent report from Trade Indemnity, a credit insurer, found that late payment is actually at its worst for three years.

Others, notably the Federation of Small Businesses, have concluded that the situation is getting less severe. A survey by the FSB found that small firms are usually now waiting 65 days for their money (compared with typical specified terms of 30 days), a marked improvement against the 74 days average a couple of years ago. In particular, says the FSB, large corporations are less likely to take extended credit from suppliers.

It is noticeable that the severity of the late payment problem varies between sectors. The Trade Indemnity survey found the problem is worsening for builders' merchants, food manufacturers and business services suppliers, but easing in textiles and construction. It also found that exports to France, in particular, and Italy and Germany were commonly the victim of late payment.

Another investigation, conducted on behalf of the NatWest Bank and Norfolk and Waveney Training and Enterprise Council, found that the vast majority of small firms that failed did so largely because of poor credit management skills. NatWest responded locally by offering lower interest rate loans to businesses that attended training courses to improve financial management skills.

Weak credit management and inadequate start-up capital are each the cause and effect of the other. Too often small firms operate with too little capital, making them vulnerable to late payment by customers. But, according to research conducted by Bradford University's Credit Management Research Group, small firms display a woeful failure to implement good credit control practices.

The Research Group found that in a sample group of small and medium sized enterprises, only one in five businesses had a written credit policy and 52 per cent do not agree credit terms with customers. It is hardly surprising that an identical proportion have a late payment problem, nor that most small businesses admit to, in turn, paying their suppliers late. Small firms were also guilty of poor stock control.

Bradford's survey found that British small firms are drastically under-financed compared with other EC businesses, a long- term problem worsened by the effect of the recession. The length of the recession was extended, argued the Bradford researchers, by small firms over-trading as they attempted to take increased orders without sufficient funding to finance the extra trade.

The research concluded that late payment was primarily the result of large corporations exploiting their dominant market position to obtain a cheap source of finance from suppliers. But it also found that small firms do not need to be passive victims in the equation. Late payment is the consequence of insufficient attention being paid to working capital needs, and is a symptom of weak financial management skills. One result can be the collapse of small firms that over-trade as they try to escape a cash flow difficulty.

Small firms have also, said the Bradford report, concentrated too much on obtaining money for day-to-day operations, and too little on long-term financial arrangements to fund growth. Typical of this is the over-use by small firms of overdraft arrangements, which can be instantly withdrawn by banks.

Stephen Alambritis, spokesman for the Federation of Small Businesses, says that the importance of good credit control systems should not be underestimated. "Small businesses have a long way to go to get their houses in order," he says. "They must have good invoice systems, and know who they are dealing with." It is important when taking an order for the first time to obtain specific details about the name of the person to which the invoice should be sent, and what information - order number, date of order, proof of delivery - should accompany it.

"Small businesses need to be tough and disciplined about credit control," continues Mr Alambritis. "What tends to happen is that they jump for joy when they get an order, and then worry later about not getting paid. We tell them, an order isn't an order until it is paid."