Huge positive economic impact of faster payment on small businesses

New research published by the Good Business Pays movement highlights the huge positive economic impact faster payment of invoices could have on small businesses and the wider UK economy.

The study, carried out by the Centre for Economics and Business Research (CEBR), estimates that if small businesses invoices were paid on the day they were submitted, their revenues would increase by £40b - £60b per year. This could provide a significant income boost for small businesses, helping them play a stronger role in the UK’s economic recovery.

The Good Business Pays research estimates instant payment of small businesses will increase the gross value added (GVA) contribution they make to the economy by between £12.7b and £19.7b per year. The existing ratio of GVA to employment suggests this could support between 295,000 and 460,000 extra jobs across the UK.

The study also found that small business profits would be between 1.8% and 2.7% higher in a scenario where they are paid instantly by large customers. Collective profits across the small business sector would rise by up to £6.3b per year, helping businesses claw back some of the losses they faced during the Covid-19 pandemic and make them more resilient in the future.

Today, large companies take on average 37.4 days to pay their suppliers, suggesting an additional £1.6b could be generated by small businesses for each day less they have to wait for payment.

Covid-19 has reversed trend towards faster payment

This new research into benefits of faster payment also revealed that the recent trend for shorter payment periods by large companies had reversed during the Covid-19 pandemic.

An estimated 2.3 million small businesses currently offer trade credit to their customers, of which 1.1m report having problems with customers paying later than their agreed payment terms.

The Good Business Pays research highlights a measurable worsening of payment practices. In the two years running up to the Covid-19 pandemic, large businesses had been gradually improving their average payment times. During the pandemic, this trend reversed with the average time increasing from 36.4 days to 37.4 days.

In addition, the proportion of invoices paid later than 60 days jumped by over 8% between 2019 and 2020 to one in seven (14.9%) of all invoices. In January 2021, the Federation of Small Businesses reported that a record 250,000 small businesses are set to close this year under combined pressure from the Covid-19 pandemic and Brexit.

Terry Corby, chair of the Good Business Pays campaign commented: “As businesses big and small strive to recover, they must step up and do all they can to help repair the UK economy. Now, more than ever it is important for big companies to re-evaluate their payment terms to the small suppliers who helped keep them afloat.

“From launching the Good Business Pays movement in late May, I am encouraged by the positive signals coming from many of Britain's big businesses. Making moves to pay invoices faster has never been easier, with tech enabled systems available to help businesses pay quickly, reduce risk, increase efficiency and save cost. The next big step we need to take is making faster payments an industry standard, and one that both investors and customers expect from responsible businesses.”

GoCardless has become the second corporate supporter for the Good Business Pays campaign. It follows Mastercard, the first big company to pledge its support when the campaign launched in May 2021.

Pranav Sood, VP small business at GoCardless, said: “This study reveals what many of us suspected: the problem of late payment is getting worse in the UK. This has not only created a £60 billion hole in our economy. It’s also impacting the physical and mental health of business owners around the UK, hundreds of thousands of whom are already facing the prospect of bankruptcy this year under the combined pressures of Covid-19 and Brexit. Tackling late payment will require both large and small businesses to change how they think about paying and getting paid. That’s why we support Good Business Pays.”

Kelly Devine, division president, Mastercard UK & Ireland, the first sign-up to the Good Business Pays campaign said: “Small businesses are the backbone of our economy and this research highlights the grave importance of alleviating the cashflow issues associated with late payments. As the first large company to sign-up to the Good Business Pays campaign we continue to drive innovation in this sector by bringing flexible payment solutions to the market, ensuring small businesses can pay and be paid promptly.”

Sectors hardest hit by late payment

The Good Business Pays research found the sector worst affected by late payment was professional services. More than a quarter of businesses (28%) report problems with customers paying late, followed closely by agriculture, mining and utilities (24%), then manufacturing and construction (22%).

By contrast, in the arts, entertainment & recreation sector, fewer than 1 in 10 (7%) of small businesses experience problems with customers paying later than their terms.

FSB national chairman Mike Cherry said: “Poor payment practices are debilitating for both the small businesses affected and the economy as a whole. This research aligns with FSB’s own findings that paying promptly would save 50,000 small firms a year, add billions to the economy, and improve productivity through both efficiency and stopping small business owners having to chase payments. After the disruption caused by the pandemic, a key part of the economic recovery relies on small businesses being paid promptly, and Good Business Pays is a timely campaign to drive positive change.”

Philip King , small business commissioner: “In my role as the small business commissioner I’ve witnessed first-hand the devastating impact late payment has on small businesses. That’s why I encourage more businesses of all sizes to sign up to the Prompt Payment Code, and why I’m happy to support the Good Business Pays campaign which complements the work of the office of the small business commissioner in striving to end late and slow payments, and helping small businesses thrive.”

Backed by Federation of Small Businesses, the CBI, manufacturers group Make UK, the BCC, IoD and the Creative Industries Federation, the Good Business Pays movement was launched in May 2021 to encourage the UK's largest companies to fast track payments to small suppliers, helping them bounce back and inject vital capital into the economy.

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