Cash flow is one of the most important issues facing small and medium-sized businesses (SMEs), and so the ‘late payments culture’ is a particularly worrying development for companies in the UK. Troubling economic times have led to this growing trend which sees customers delaying the payment of invoices, thereby increasing the financial strain felt by suppliers.

The problem was recognised by the government in February 2012, when small business minister, Mark Prisk, announced that action would be taken to combat poor payment practices. Now the private sector has responded to the issue, with many companies offering services targeted at businesses that are struggling with liquidity issues.

One ’solution’ that has gained notoriety in the press is the new small business loans service from Wonga. The company is already established as a provider of payday loans to consumers, and is now applying the same principle to business customers, offering struggling businesses stopgap loans in just fifteen minutes. But this new venture has faced a backlash, with some warning small businesses that this debt solution could in fact spell financial ruin.

When consumers take out personal payday loans they know when and how much they are due to be paid, but business finances don’t always have that level of predictability. If an SME has a slow month and finds it cannot make the repayments, it will be subject to very high APRs and could see its debt rise out of control.

The point is that Wonga loans are a very short-term solution which should only be considered by companies that are absolutely sure that they can repay the money at the agreed times, and at the agreed rates. In order to tackle the nation’s late payment culture businesses must first address the underlying issue of liquidity. Great business plans and profit projections are one thing; having the cash to achieve real results is another. Ensuring cash flow is the first priority of a small business and will be the foundation on which its growth is built.

Factoring and invoice discounting

Financial measures like factoring and invoice discounting, for example, can also reduce cash flow problems by speeding up payments which would otherwise take a long time to reach the payee. Businesses also have recourse to the law. According to The Late Payment of Commercial Debts (Interest) Act 1998, companies can claim interest on the value of delayed payments. This may cause tensions between the organisations concerned, but punctual payment is fundamental to ongoing business relationships and failure to pay on time must not go unchallenged.

Other avenues open to small businesses include the use of standalone payment websites which can be set up to host payment transactions. Merchants can use these to email a secure link and watch while their customer make payments in real-time. The perpetrators of bad payment practices are also being named and shamed on sites like the Hall of Fame run by PayOnTime.com. But this kind of public humiliation can, of course, affect business relationships and it is wise to weigh the pros and cons before proceeding along this route.

Increasingly, businesses are scrutinising the credit periods offered to them and the payment deadlines they demand of customers. This is very important, as the last thing a growing business needs is to be stuck in a cash flow no man’s land every month.

A late payment culture

The late payment culture is now firmly established, and businesses should be mindful of the troubles it is causing, focusing on managing cash flow and choosing only to supply to people who are known to pay efficiently. This might mean a compromise on price, but rather sell to someone at a lower rate, secure in the knowledge of payment, than be proud of an amazing deal that never pays off.

Small businesses are taking matters into their own hands in the fight against the UK’s late payments culture. There are two sides to every instance of late payment, but SMEs should take steps to help resolve all issues as swiftly as possible. First and foremost, they must not accept bad payment practices as the norm. The cheque isn’t always ‘in the mail’, as many customers try to maintain. If necessary, small businesses must insist on alternative payment methods, such as credit card or online payment pages.

Is Wonga wrong? Not in all cases, but it must only be used to tackle short term liquidity issues by businesses that know for sure that they can keep to their repayment schedule.