SME manufacturers forced to wait twice as long for invoices
Smaller UK manufacturers are being forced to wait nearly twice as long as their larger competitors for invoices to be paid, research from the Asset Based Finance Association has shows.
SME manufacturers waited an average of 67 days for invoices to be paid last year whereas the largest manufacturing businesses, those with a turnover over £500m, waited an average of just 38 days.
The ABFA also found that the difference in waits for payment between SMEs and the biggest manufacturers has increased over the last year.
The delay in SME manufacturers receiving payment remained level at an average of 67 days, contrasting sharply with the largest manufacturers who saw their average wait decrease by 9%, down from 42 days in the previous year (see graph below).
The ABFA suggests that the figures indicate the issue of late payment, and poor payment practices more generally, has become increasingly ingrained in business practice since the credit crunch and has now become endemic across many sectors.
In addition to late payment, the ABFA explains that it is increasingly common for large businesses to seek to impose extended payment terms in contracts with their SME suppliers.
Jeff Longhurst, chief executive of the ABFA, said: “Unfortunately, for many SMEs in the manufacturing industry, waiting more than two months to be paid is now a normal state of affairs.
“During the recession some businesses looked to increase their payment terms in order to give themselves breathing space in the tough economic climate. Unfortunately, in many sectors there’s been a cultural shift and delaying payment to suppliers is now common practice. Larger businesses need to treat their smaller suppliers more fairly.
“Late and extended payment times are deep-rooted issues in the manufacturing industry. This doesn’t just impact on the business in question; they need to pay their own suppliers and so there is a cumulative negative effect down the supply chain.
“Late payment of invoices and other poor payment practices have a significant impact on the UK’s competiveness and ability to attract further investment to the sector.
“The UK has a proud history in the manufacturing sector and substantial delays for payment hit SMEs particularly hard, threatening the very businesses that the UK’s industrial traditions have been built upon.
“Across many sectors, there is also the wider issue of larger businesses taking advantage of their position and seeking to impose longer payment terms on their suppliers. This often leaves SME suppliers with little choice but to accept them or face losing a substantial proportion of their order book. Hopefully, with the introduction of a Small Business Commissioner, the situation is improving for SMEs as they will receive more assistance in disputes with larger businesses.”
Manufacturers with a turnover below £1m hit hardest of all
The ABFA added that it is the very smallest manufacturers (with turnover below £1m) who are hit hardest of all, seeing average payment waiting times increase from 69 to 71 days last year – over 14 weeks.
The ABFA explained that accessing funding through invoice finance is an increasingly popular method of mitigating the impacts of extended payment terms or late payment. Invoice finance allows businesses to receive payment up front for their unpaid invoices, ensuring they are protected against unfair payment practices, and letting them invest in their growth.
It said that 80% of asset based finance is invoice finance, in which businesses secure funding against their unpaid invoices, while the other 20% represents the fast-growing area of asset based lending, in which businesses can raise money secured against a range of other assets they own, including inventory, property and machinery.
Longhurst added: “These figures show that it’s more important than ever that the manufacturing sector fully understand the options available to them to free up the funds they require and to minimise the impact of late payment and other poor payment practices.
The ABFA says that the overall amount of funding provided to businesses through asset based finance – including invoice finance as well as asset based lending – rose by £260m in the past year to stand at £19.7bn at end of December 2015.”
The ABFA is the body that represents the asset based finance industry in the UK and the Republic of Ireland.