Post-Pandemic Payments: Establishing Better Practices
The UK Commercial Finance week spanned multiple days covering a wide range of topics pertaining to the current financial environment. Our last article analysed the need to Small for Medium Enterprises (SMEs) to focus on supply chain resilience and to consider integrating renewable energy into their operations. This article will focus on the ways in which the COVID-19 pandemic has affected the timing of payments and how the effects ripple throughout supply chains and industries. Furthermore, the role the financial services sector will play in the economic recovery from the pandemic and Brexit will be important in helping deliver a better payment culture.
The Domino Effect Runs Deep
Matthew Davies, Director of Invoice Finance and Asset Based Lending at UK Finance, started off one the seminars with the distinction between “late payment” and simply “bad payment” practices. Larger corporations hold more leverage than smaller ones when abiding by (or deviating from) contractual arrangements. While a larger company could pay their dues on the final day, it isn’t technically late—although the knock-on effect of unreliable payments can result in very real consequences for the SME. Liz Barclay, Small Business Commissioner at the Office of the Small Business Commission, stressed the need for some mechanism to help smaller businesses get more security and prompt payments from other corporates. Barclay has seen first-hand the negative effects of ‘inertia’ in sticking to contractual payments, particularly for SME owners. If a payment comes late, SMEs rarely have the working capital to continue to pay overheads or even remunerate staff at the end of the week (this is where the power of invoice finance and trade credit insurance can benefit a business!). It is a very real possibility that some employees might not be able to feed their families because of the ostensible truculence of larger corporates. Lauren Couch, Managing Director at Growth Lending, stated that around 80% of the issues she deals with pertain to poor payment practices, and it has only gotten worse—62% of survey respondents stated that they had experienced late payments because of the COVID-19 pandemic. Glen Morgan, Managing Director of Credebt, predicted that such trends might continue. Prior to the pandemic, there was £50b of overdue or late payment debt within the SME community; Morgan predicts that that number could increase by 50% to 100% by the end of the year.
The take-home message for SME owners is that poor payment practices can be the bane of business functionality if not prepared for adequately. Access to financial services is unequivocally a risk-mitigating factor; multiple times throughout the seminars, the attendants explicitly repeated the consensus that SME access to financial services (such as Invoice Finance and Asset Based Lending) is almost a necessity in navigating through risk-management terrain. Martin McTague, Chair of Policy at the Federation of Small Businesses, called for Government intervention to help centralise the problems of poor payment practices and reform such fiscal culture. There could be investigations into those who clearly do not meet contractual standards. In fact, Glen Morgan later stated that their own research had found a list of 20-25 names that fairly consistently show up in the supply chains of those who are struggling. It’s very important for SMEs to be aware of what this potentially holds; a seemingly lucrative contractual procurement might seem like a Godsend to the SME owner, but only with financial experience could one tell that such a contract could implode their finances further down the line. A good lender, for instance, will be familiar with the pressure points of a supply chain and the risks native to each involved sector. As Lauren Couch also states, a historical understanding of the financial changes over the last 18 months is imperative, and it is also important to have some access to funding when unexpected situations arise. Matt Davies chimed in to remind the panellists that while the UK Treasury does a great job of tracking a plethora of trends and changes, we nevertheless lack a centralised data bank on the cumulative effects of late or poor payment practices on supply chains. Davies also remarked that, perhaps, too few business owners are actually aware of or recognise the risks associated with late payments. Without the data or intervention, it is burdensome to analyse debt practicing patterns. In these situations, an SME could potentially reach out to find a dedicated credit controller, as Glen Morgan suggested. The ultimate way, however, to change a lacking payment culture is to educate business owners how to redress the balance by providing them with knowledge, tools, access, and familiarity with the markets.
A Strong Economic Recovery
Richard Barnwell, Partner at BDO, underscored the prospective and key role that commercial finance service providers will hold as the economy recovers from the pandemic. The COVID-19 pandemic appears to have rendered many business executives less accountable for poor decision making (particularly those of much larger enterprises). The Financial Conduct Authority’s initiation of the Senior Managers and Certification Regime (SMCR) could place the onus on the firm to adapt operations to a post-pandemic environment—this could see the changing of monitoring systems, communication with management teams, and a centralisation of conduct risks, while maintaining fair customer treatment. Mike Conroy, Director of Commercial Finance at UK Finance, reminded viewers that many SMCR policies were in place prior to the pandemic, but the SMCR could make firms too risk apprehensive to help provide support for SMEs. However, Richard Barnwell expressed hope that the SMCR policies would not have a negative impact on firms’ behaviours per se, but we could expect changes such as hybrid working affecting business models. Senior management meetings will likely continue to occur online (or, at least, until it is not impractical to have 20 people in the same room), and the ability to monitor staff while working elsewhere must be done in a manner that isn’t too intrusive. People might even be behaving differently over the online medium, perhaps distancing themselves from the realities of their businesses. One wonders whether the poor payment culture has been influenced by the indifference online working might have encouraged.
Tom Spanner, Director and CEO of ChargeCheck, posits that there will be risks involved both on the firm’s side and the borrower’s side. Lenders will suffer greater risks because of the lack of activity over the last 18 months and they might still have negotiations ahead to get money out in the first place. Borrowers are facing greater insecurity because of their cumulative debts; there has been a greater lag in payments, particularly due to the poor payment practices endemic to 2020-2021. Furthermore, many SMEs still have CBILS and BBLS payments to cover, adding to their financial strain. Tom Cox, Partner at FRP Advisory, stated that the attraction to various financial services will be based on the simplicity and speed of the funding. However, this could precipitate in borrowers’ credulity, inciting them to go for headline rates and pushing them to assume that regulations will cover them in case of something going wrong. This is not always the case, and it is important for the SME owner to be aware of the risks. Due diligence is a necessity for SME transactions and financial arrangements, as the last 18 months saw a staggering number of companies take out loans and borrowings that no other enterprise in its vicinity will even be remotely aware of. The huge off balance-sheet liabilities render successful due diligence, careful planning, and the appropriate strategy paramount.
Concluding Remarks for the Small Enterprise Owner
One of our previous articles covered a growing power imbalance between small and large enterprises. This article has reported, there is also an endemic of poor payment practices. In this case, the correlation implies a causation — the UK Commercial Finance Week has only confirmed the suspicions. With larger corporations holding more leverage in reneging contractual obligations than smaller enterprises, it is undoubtedly the consequences of supply chain problems streaming all the way down the food chain to the employee. It is imperative for SME owners to fully understand the risks involved with late payments or simply poor payment practices within their company. From there, the panelists appear to recommend contacting experts and specialists in the field—educating yourself on the pressure points of your supply chain, the vulnerabilities of your sector, and the access to funding, will all remedy the problems from poor payment practices.