Software as a Service vendor Ormsby Street has said that UK SMEs are increasingly being forced to use the UK court system in order to get paid. The company who provides financial data services to SMEs looked at the data it holds on behalf of 27,000 UK-based customers. It discovered that over 23% more businesses filed County Court Judgements (CCJ) in the second half of 2015 compared to the first half and that the average amount pursued was £4,619.
The UK has made it easier to bring a CCJ by moving the whole system online. It also ensures that there is some limited compensatory interest for the overdue debt although this is unlikely to cover all costs. This is because few SMEs have the ability to calculate the costs they have previously incurred such as postage, telephone calls and time spent chasing money. They also struggle to estimate the impact on the business in terms of additional banking costs for short term loans to cover late payments.
Martin Campbell, Managing Director, Ormsby Street said: “Late invoice payment is fast becoming the scourge of small business in the UK, causing cash-flow issues that can impact growth and even the very existence of a business Almost £5,000 is a significant amount for any small business to have to go to court to chase, and it is hugely unfair that a small business should have to spend its precious time and resource on chasing payment for work that has already been delivered.”
SMEs no saints when it comes to bill paying
There has been a lot of press around the way large companies treat SMEs including unfair payment terms and late payment. The problem, however, isn’t just confined to that large/small company relationship. SMEs are often just as guilty of paying their suppliers late as their cash flow gets squeezed.
At Xerocon London 2016, Xero UK MD Gary Turner told the audience: “SMBs are very lax about paying their bills with 91% of invoices overdue.” When we asked Xero CEO Rod Drury for clarification he told us that the statement was correct. “There are lot of people funding their businesses by withholding money from other businesses. SMEs are just as guilty of not paying their bills as any other company.”
To make matters worse, other speakers at Xerocon pointed out that the problem is one of basic cash flow. Many small businesses are working on around 60 days of cash at hand yet the overdue rate of invoices is currently in excess of that. If an SME goes to court then the problem gets worse. Once the CCJ has been filed it has to be sent to the debtor who can then take another month to respond. If they request a hearing or counterfile the debt keeps on growing.
The other challenge for SMEs is collection. They can rely on using the County Court appointed bailiffs but they have limited powers. The alternative is to get the CCJ and then take the debt straight to the High Court whose bailiffs are often able to force a resolution far more easily than the County Court can. But at the end of this there is another penalty and that is the loss of a customer.
Ormsby Street says CreditHQ can solve this
One way to prevent this happening in the first place is to credit check customers before dealing with them. This is what Ormsby Street offers with its CreditHQ SaaS solution. It uses a range of credit data from company records and other providers to assess the credit worthiness of a company. It uses a simple red, amber, green system to provide information on the risk of providing credit to a company.
Unlike other systems it also provides SMEs with a range of materials that their accounts team can use. This includes template letters, samples terms & conditions as well as help in how to chase bad debts. The whole service comes for just £15 per month
Campbell says: “Few small businesses have the time to spend chasing bad debt and taking companies to court, and nor should they have to. Credit-checking potential customers and partners is really straight forward and can save untold time, money and hassle in the future. Unfortunately, small businesses cannot rely on people paying their invoices on time and they need to protect themselves against this, by learning who is likely to be a good payer and who is not.”
Ormsby Street just the latest in a long line of solutions
The problem of not getting paid and having cash flow impacted is nothing new. There is a long history of invoice factoring where SMEs sell their invoices on to other companies who will give them a settlement value up front. However, should the debt be difficult to collect it is not unusual for the factoring company to return to the SME and expect them to take the invoice back.
Last year the University of Warwick spin-off Funding Invoice launched in the UK. Since launch, however, it has issued no numbers or details around how well it is doing and how many SMEs it has managed to sign-up. Unlike factoring it is a peer-to-peer model which has been popular in recent years. However, the BBC reports that Lord Turner, a former City of London regulator has warned that there is a high likelihood of a major crash in that market in the next decade.
Xero’s Drury also believes that there are better ways than factoring. He told Enterprise Times that Xero is working on its own equivalent to CreditHQ but one that appears to go further. For example, Drury indicated that the credit scoring would actually provide information about what terms to offer a customer. A discount if they pay early or a premium if they have a record of not paying promptly.
Whichever solution SMEs choose they will need to ensure that it is suitable for their business and this is where accountants have a role to play. Drury believes that they need to be more involved in the way small businesses work and can create a place where they are seen as the trusted advisor. For many SMEs however, doing their own accounts rather than paying an accountant is seen as an acceptable cost saving.
Small businesses have always suffered unfavourable terms and until governments tighten rules the situation will not change. With most major economies being increasingly underpinned by SMEs and the self-employed restricting money to them means it doesn’t enter the financial chain. As a result it can create a significant drag on financial recovery.
It will be interesting in a few months where Ormsby Street reports the CCJ rate. Will it continue to rise? Will it begin to drop off? While the rate of corporate bankruptcy continues to decline it would not take much to speed that up.