For SMEs, delayed and unpaid invoices and bad debts represent a significant financial burden.
Late payments and uncollected invoices are common across a range of industries, affecting cash flow, profitability, and even the survival of businesses. This article explores the scale of the problem, some of the sectors most affected, and some strategies SMEs can employ to mitigate this issue.
The Scale of Unpaid Invoices and Debt Write-offs for UK SMEs
The effect of delayed and unpaid invoices on SMEs is significant.
According to a March 2023 report from the Federation of Small Businesses (FSB), on average 52% of SMEs in 2022 experienced late payments in the previous three months.
A press release from the Department of Business and Trade on 19 September 2024 confirmed that delayed and unpaid invoices costs SMEs £22,000 per year with 56 million hours of lost productivity and up to 50,000 businesses closing a year.
Late payment research from the Department of Business and Trade published on 19 September 2024 also found that 18% of businesses surveyed suggested that late payments are driven by their business customers purposely paying late, treating it as a form of ‘free finance’. Surveyed businesses also considered that 24% of payments they received were due to administrative errors; due to their own customers being paid late (40%) or worsening economic conditions (29%). This illustrates the impact of an upstream late payment having an impact down the contractual chain.
In contrast, in respect of payments made by businesses surveyed, 36% of businesses attributed their delayed and unpaid invoices to administrative errors; 31% to disputed invoices; and 23% to technical issues, such as invoices getting lost or not being sent.
The research shows that the mean percentage of payments which were late, depending on the sector were: 11% in the insurance sector, 16% in the services sector, 18% in the construction industry, 19% in the pharmaceutical sector and 21% in the good sector.
Large businesses (42%) and those involved with the supply of goods (38%) were more likely to formally pursue late payments, whereas micro businesses (19%) were less likely to. 68% of businesses informally pursue late payments.
Of those surveyed, 33% confirmed that the key reason for not formally pursuing delayed or unpaid invoices was to preserve the commercial relationship with a debtor. However, 29% said that they did not formally pursue late payments because the lateness of the payment was not significant to justify such measures.
A 2023 QuickBooks survey revealed that 73% SMEs were negatively impacted by late invoices in the previous year and on average were owed £27,214 in late payments. Of those surveyed, it was estimated were owed:
- Up to £9,999 (28%)
- £10,000 – £49,000 (14%)
- £50,000 – £100,000 (11%)
- Not owed anything (33%)
- Don’t know (14%)
However, the amount owed is not the whole story – the survey did not put a capital £figure on the cost to businesses in dealing with late payments. It did however illustrate the hours spent by businesses chasing late invoices:
- Less than one hour (27%)
- One to four hours (20%)
- Five to 10 hours (9%)
- More than 10 hours (6%)
- No time spent (38%)
In 2023, research by NatWest revealed that over a quarter (27%) of SMEs are owed between £5,000 and £20,000 in unpaid invoices. Moreover, 55% of SMEs have reported an increase in late payments throughout 2023. The time cost is also significant, with 31% of businesses spending between 21 to 30 hours per month chasing overdue payments. Additionally, 46% of small businesses cite the time spent chasing invoices as having the most noticeable impact on their operations.
Whilst these statistics on delayed and unpaid invoices are drawn from a variety of different sources illustrating different data sets, they all show a systemic issue faced by businesses in receiving payment on time – not only impacting cash flow but also the time spent in seeking to recover unpaid debts which could otherwise be spent on more profitable endeavors.
Sectors Most Affected by Delayed and Unpaid Invoices and Debt Write-offs
Delayed and unpaid invoices and bad debt are not uniformly distributed across all sectors. While nearly every industry experiences the challenges of late payments, some sectors are more significantly affected than others. Some of the sectors most burdened by this issue include:
- Construction and Building Services
The construction industry is notoriously affected by delayed and unpaid invoices. According to research by Atradius, construction firms face average delays of 75 – 90 days on payments – almost triple the average 30-day payment terms expected by most businesses. In addition, smaller firms are often at the mercy of larger contractors, which can lead to significant cash flow problems.
- Wholesale and Distribution
The wholesale and distribution sector is another area highly impacted by delayed and unpaid invoices. This sector often operates on slim profit margins, which makes cash flow issues even more critical. Close Brothers Invoice Finance reports that a third of businesses estimate that they are owed over £40,000 in late payments.
Wholesale businesses in particular are often exposed to bad debt write-offs from their retailers. The collapse of major retailers and the ongoing challenges faced by the high street exacerbate the problem, with suppliers struggling to recover costs.
- Manufacturing
Manufacturing is another sector where delayed and unpaid invoices are common, especially among small manufacturers and suppliers. According to research from Close Brothers reported in August 2024, late payments are an issue for 38% of manufacturing businesses, with the majority owed between £20,000 and £40,000. Over a third said late payments were more of an issue “today” than a year before.
- Professional Services (Legal, Accounting, and Consultancy etc)
Professional services such as legal, accounting, and consulting firms frequently face issues of late payment and debt write-offs. This often happens due to disputes over service quality, client financial problems, or administrative delays.
Many professional service firms operate on a variety of payment structures, which can lead to confusion over when payments are due. As a result, legal actions to recover unpaid invoices occur, but they are often costly and time-consuming.
- Hospitality and Leisure
The hospitality and leisure sector has faced significant challenges in recent years, not only due to the COVID-19 pandemic but also because of issues around payment terms. This problem is further compounded by the seasonality of the industry, as cash flow can be unpredictable, and clients can often be slower to pay during off-peak times.
It is also important to recognise that some of the statistics above may be impacted by covid or the post-covid recovery period. However, many of the statistics relate to a time when many sectors will have considered that covid was in “the past”.
These statistics demonstrate that delayed and unpaid invoices are an ongoing issue that affect SMEs across various sectors, causing not just financial strain but also consuming valuable time that could otherwise be spent on growth and business development. Some solutions to the impact on SME’s of unpaid invoices are set out below.
The Impact of Unpaid Invoices and Debt Write-offs on SMEs
Unpaid invoices and bad debt write-offs have far-reaching consequences for SMEs. These include:
- Cash Flow and Liquidity Issues
Unpaid invoices hinder cash flow and liquidity, which are vital for the day to day operations of SMEs. Without consistent cash flow, businesses may struggle to pay their own suppliers, invest in growth opportunities, or cover operating expenses like wages and rent.
- Growth Restrictions
Bad debt reduces the working capital available for businesses to invest in growth opportunities such as new product lines, marketing efforts, or technology upgrades. This lack of investment stifles innovation and competitiveness, keeping SMEs from expanding or achieving their full potential.
- Credit and Financing Challenges
Poor cash flow due to unpaid invoices can add risk when seeking new finance as a finance provider will be looking at cash flow and an ability to repay any finance obtained. This makes it more challenging to secure financing or investment, and even when credit is available, it may come at higher interest rates.
- Increased Administrative Costs
Chasing late payments and managing debt write-offs require administrative resources. SMEs often have to employ staff or engage collection agencies or solicitors to manage overdue invoices, which is time-consuming and adds cost.
- Business Survival at Risk
Perhaps the most critical impact of unpaid invoices and debt write-offs is the threat to the very survival of SMEs. For many small businesses, even a small percentage of unpaid invoices can be devastating, leading to insolvency or forcing the business into insolvency.
Mitigating the Problem of Unpaid Invoices
While unpaid invoices are a persistent issue for SMEs, there are strategies and measures that businesses can adopt to mitigate the impact and reduce the likelihood of bad debt write-offs.
- Implementing Strong Credit Control Policies
Businesses can minimise the risk of bad debts by conducting credit checks on new customers, setting clear payment terms, and using robust credit control systems to follow up on late payments promptly.
- Using Invoice Financing or Factoring
Invoice financing and factoring are financial services that allow SMEs to borrow against unpaid invoices. By receiving an advance of the invoice amount, businesses can improve cash flow and mitigate the impact of late payments. Careful consideration should be given to borrowing against invoices and it is sensible to ensure that the invoices to be borrowed against are not owed by companies in financial difficulty – if the debt continues to be unpaid or is unrecovered, the finance will still need to be repaid (on time).
- Offering Incentives for Early Payment
Offering small discounts for early payments can encourage customers to settle invoices promptly. Conversely, enforcing penalties or interest on overdue payments may also serve as a deterrent for late payment.
- Automating Invoicing and Payment Processes
Automation tools for invoicing and payment reminders can improve efficiency and reduce the likelihood of late payments. Digital invoicing solutions can streamline the payment process and make it easier for clients to pay on time.
- Engaging Legal Services for Debt Recovery
While it is often a last resort, engaging solicitors to recover unpaid invoices can be effective. It also enables the enforcement of a judgment for the debt, providing additional avenues for the recovery of unpaid debts. Engaging a solicitor early allows businesses to consider the options available to them before the commercial relationship with their customer or client sours.
Conclusion
The issue of unpaid invoices and bad debt write-offs poses a significant challenge for SMEs in the UK, with some sectors like construction, wholesale, manufacturing, and professional services being particularly affected. The financial impact of late payments can lead to cash flow difficulties, restricted growth, and even business insolvency.
While government support and regulations exist to help SMEs navigate these challenges, it is critical for businesses to adopt proactive strategies, such as credit control policies, invoicing automation, and debt recovery measures, to reduce the risk of unpaid invoices.
Ultimately, addressing the issue of unpaid invoices is not just about safeguarding the bottom line; it’s about ensuring that the UK SME sector remains vibrant, competitive, and able to drive economic growth in the years to come.
Prevention is better than a cure and businesses should be mindful of the need to risk assess the likelihood of payment in relation to their products and services, particularly higher value or higher volume orders which may have a bigger impact in the event of a delayed or non-payment of an invoice.
There are a number of options available to businesses to mitigate the effect of unpaid debts or recover them and, particularly for larger debts, it will be a balance as to what steps are appropriate in the circumstances and what the ultimate commercial objectives are for a business.
The information contained in this article is for information purposes only and should not be relied upon. All information is provided in good faith. It is not intended to be, and does not constitute, legal advice. No liability is accepted for any reliance on the information provided in this article. Legal advice should be sought on any particular issue.
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