One of the biggest hurdles for growth for small businesses lies in the supply chain. Late or extended payment terms from larger business customers are a perennial issue, putting cash flow under strain in an environment where the cost of doing business keeps going up. 

A recent ICAEW round table on small business barriers to growth set out to determine the extent of the problem and what could change in order to ease the burden. 

“You may spend far too much of your time chasing payments as opposed to running your business and growing your business,” said Iain Wright, ICAEW’s Managing Director, Reputation and Influence, who chaired the meeting. “That’s a burden in itself. So what can we do about that?”

One of the round-table participants was Liz Barclay, the UK Small Business Commissioner. She works to provide resolution for small businesses (50 employees or fewer – the same size threshold as ICAEW’s small and micro business community) that are experiencing problems with bigger customers. 

“A big problem is that smaller businesses are not always keen for us to intervene,” Barclay said. “All of you who run small businesses probably know that the last thing your business wants is to lose future work coming down the pipeline.”

Barclay was joined by business owners, representatives from ICAEW and other figures with an interest in the success of small businesses. 

Quarter-to-quarter throughout 2022, 52% of small businesses on average experienced late payment, and one in four saw the number of late payments increase, according to data seen by the Small Business Commissioner. On top of this, larger businesses are often insisting on 90- and 120-day payment terms, which simply isn’t sustainable for a lot of small businesses. 

“One of the biggest problems isn’t late payments – it’s extended payment terms,” Barclay said, relaying a case she’d heard from an SME that was offered a contract to supply a major coffee firm with biscuits across their chain, but had to turn it down due to 120-day payment terms. “That’s not practical for small businesses when they won’t have the money upfront to buy the raw materials.”

Attendees agreed that there was a difference between the closer, respectful relationships that can be developed between SMEs and the more distant relationships with larger corporations. 

“When I deal with small businesses, I spend a lot of time talking to the small business owner,” said the owner and CFO of a fulfilment business. “You have a mutual respect. However, when we are approached by large companies, there are a lot more layers to get to the top. You’re not talking to a decision-maker.” 

A small practice owner who works with a lot of small businesses commented that the challenges vary from industry to industry, with some doing better than others, but there are many facing a vicious circle of late or long payment terms and spiralling debts. “They’ve got issues with debtors, but they can’t afford to solve the problem. So they end up in an even deeper hole because they can’t pay the bills.” 

The Prompt Payment Code (PPC) has now been in place since 2008, with 4,408 businesses currently signed up to it. Round-table participants raised questions around its effectiveness and how that is measured, and whether more could be done to encourage businesses to sign up to it and comply with it. 

In that light, the question was raised: should Parliament step in and legislate that, unless it meets certain criteria, every business should pay their invoices within 30 days? Most attendees tentatively agreed with this idea, but the practicalities of introducing such a measure was not discussed.

The owner of a well-established manufacturing company expressed that, as a more established SME manufacturer, he is in a position to push back against larger customers that might insist on unfavourable payment terms. “We can be quite bold because we have cash in the bank. It can hurt if we lose a business, but it’s not a disaster for us.” 

Belt and braces manufacturing is getting by, as are more specialist businesses, but newer businesses struggle with cash flow, he said. “It’s a gamble, but we can afford it.”

There needs to be a somewhat no-nonsense mentality without the fear of losing a client, attendees agreed, but this is easier said than done for many businesses, particularly as they do not have the cash security needed to be bolder. 

The current credit crunch being experienced by small businesses is exacerbating the problem as many struggle to get funding from banks. Most attendees agreed that even setting up a bank account was proving difficult, with many using apps such as Monzo and Starling in place of a mainstream business bank account. “You can register a company in 10 minutes, get your first client in a week, but getting a bank account can take three months.” 

Anti-money laundering (AML) rules were believed to be partly to blame for causing the delays and blockages in access to banking and funding for small businesses. One of the issues highlighted by attendees was the lack of local banks for small businesses to use – or at least, the lack of local bank managers that can authorise loans and bank accounts. Digital alternatives were not a suitable replacement for this in the eyes of attendees.

Grant funding, through the various initiatives available to businesses, is also not always straightforward. The co-founder of a tech firm recalled applying for funding from Innovate UK. “It’s fantastic, but if you’ve ever got an Innovate UK grant, you’ll realise the cash-flow terms are completely against what small businesses are about.” 

The first instalment of the funding is released six months after the project has been delivered, she explained, which is not helpful for a small business with tighter cash flow than larger entities. It necessitates going to a bank for a bridging loan, meaning that much of that funding gets syphoned off to the moneylenders, instead of staying with small businesses. Changing rules around grant delivery to stage the release of those funds would be helpful to small businesses and would stimulate growth.

With the financial expertise around the table, the attendees were in a somewhat privileged position to manage the challenges than most. “People around the table are lucky that they’ve got the fundamentals right,” said one attendee. “Not all businesses have a financial background.”

Participants stressed the opportunity for accountants to offer more to help small businesses manage their day-to-day financial performance and cash flow. The practice owner said that she often encourages clients to try this sort of service. “They don’t always see the benefits of it. It’s about getting them to see the light.”

Ultimately, attendees agreed, unnecessarily long or late payments are an ethical issue. The CFOs of large companies should be setting the tone for how the organisation deals with small businesses. An independent consultant that specialises in the construction sector recalled working for a finance team where its leaders were very clear that small businesses were to be paid promptly and given reasonable terms. That should be the norm, attendees agreed.

Barclay is talking to non-executive directors on various boards trying to get fair payment terms to be considered part of the environmental, social and governance agenda. “It is a governance issue,” she said.

Ultimately, attendees felt that policymakers need to listen to the small business community and take their needs into account when designing rules around public grants, AML requirements and holding businesses to account for harmful payment practices. Without that consideration, their mere design could hold small business growth back.

• ICAEW will be responding to the Treasury Select Committee Call for Evidence on SME Finance, which has a deadline of 1 September. We are currently gathering further views from members across the UK that will form part of this response. If you have insights you would like to share, please email Simon Gray, ICAEW’s Head of Business.