Recent information released form a study by Bacs Payment Services, the company behind the well known BACS electronic payment and direct debit service and owned by 15 UK and international banks, shows that the issue of late payment is still a problem for small firms and the situation has deteriorated considerably since the middle of 2009.
According to the research, small firms are now waiting for more than 40 days beyond agreed payment deadlines, an increase of almost ten days compared to June last year. This figure broadly concurs with the findings of ‘payment practices barometer' report produced by Atradius at the same time, which showed that British companies were waiting just over 28 days.
Interestingly, the BACS figures showed that the most common reason behind late payment was problems with cash flow with almost 40% citing this as the primary cause, an increase of 9% compared to June last year, when it was still the main reason for late payment.
Late payments also have a knock-on effect as it slows down cash flow to the payee and in turn affects their ability to pay. As a consequence, almost 60% of the UK's 1.6 million SMEs are being affected by the problem of late payments. However, the often-quoted view that it's better to have a late payment than no payment at all is of little comfort when the delays push companies into insolvency, estimated to have reached a figure of around 4,000 in 2008 by the Forum of Private Business (FPB).
For many companies, credit insurance provides an effective solution against protracted payment default and the risk of non-payment as a result of customer becoming insolvent as well as reinforcing their own in-house credit management functions with an integrated collections service as part of the policy.
Trade credit insurance is widely used by businesses of all sizes to protect them against a range of trading risks, but it has often been perceived by many SMEs as being too complex, expensive and difficult to administer. However, it doesn't have to be that way.
"We work with a large number of SMEs, particularly in the UK and we understand that they are busy people looking for top quality support that can be delivered in a simple, consistent and effective manner. Consequently, we're rolling out products that will give our core SME customers a fixed price policy with an annual declaration of turnover and high quality cover which eases administration and stay in control of costs," said Pete Davies, the UK country manager with credit insurer, Atradius.
"The cost of credit insurance reflects the risk present within a customer's portfolio and it can vary depending on the type of cover provided. However, I believe this represents good value for money when compared against cost a company could face in the event of their a customer defaulting on payment or becoming insolvent. Payment delays can have an immense impact on any company and the loss of income should a key customer collapse, can put into their own survival at risk. Anyone looking at credit insurance, possibly for the first time, should investigate it thoroughly I am confident that many will be pleasantly surprised at what is available."
In general, credit insurance is now much more geared to the specific needs of small firms as credit insurers package products specifically for the SME sector. Atradius, for example, includes a collections service within all its policies, including the latest SME fixed price policies, which gives the policyholder free access to its commercial collections service that automatically chases down outstanding payments to further help improve cash flow.
Although there are numerous benefits to being small business operator, one of the drawbacks is the vulnerability to cash flow issues caused by payment delays. If one or two customers fail to pay on time, the impact can be disproportionally high for a small business as cash flow is severely reduced, stifling the company of vital funds and limiting its ability to operate effectively.
The experiences of the past couple of years pushed many businesses to the brink of failure and beyond, but for a large number, a key contributory factor in their survival has been their trade credit insurance policies, which have enabled them to maintain cash flow and continue trading. The role of trade credit insurers is to help businesses manage risk, concentrate on profitable sectors and to trade safely.
For any business that has already experienced the pain and disruption of payment default, it's unlikely that they will want to experience it again and trade credit insurance can hep ensure it doesn't.
For more information please visit www.atradius.co.uk
