19054294

LATE PAYMENTS:
HOW LONG DO SMALL BUSINESSES HAVE TO WAIT FOR
PAYMENTS AND WHAT EFFECT DOES IT HAVE ON THEM?

Word Count: 2030

19054294

TABLE OF CONTENTS

Table of Contents............................................................................................................................ 1

Introduction.......................................................................................................................................... 1

Aims and Research Questions........................................................................................................... 3

Proposed Research Questions...................................................................................................... 3

Revised Research Questions......................................................................................................... 3

Background.......................................................................................................................................... 4

Findings................................................................................................................................................ 5
Laws and Legislation...................................................................................................................... 6

Mediation..................................................................................................................................... 6

Legal Action................................................................................................................................. 7

UK Late Payment Law (Interest) act 1998.................................................................................7

How long it takes for customers to pay their invoices.................................................................8

Which Industries are affected mostly by late

payments…………………………………………….10

The Construction Industry....................................................................................................... 11

What effects late payments have on small business.................................................................12

Conclusion..................................................................................................................................... 14

References..................................................................................................................................... 15

Blogs................................................................................................................................................... 16

Gantt Chart......................................................................................................................................... 17
........................................................................................................................................................ 17

Page 1 of 18
19054294

INTRODUCTION

This document is a report for the University of Hertfordshire to review the literature
concerning late payments and gain understanding of the existing research relevant to late
payments to small businesses. This literature review will cover existing research on laws and
legislation regarding late payments, how long it takes for small businesses to receive
payment for invoices, whether construction is affected by late payments, what effects late
payments have on small businesses and what can be done to avoid late payments. This
literature review proposed and revised aims and objectives of the literature review, explains
the background, and sets out the structure of the literature review.

Page 2 of 18
19054294

AIMS AND RESEARCH QUESTIONS

The aim of this literature review is to identify what is currently known about late payments to
small businesses and to identify any gaps in the existing evidence.

PROPOSED RESEARCH QUESTIONS

 ‘Use the government website to research what laws and legislations are available for
small companies dealing with late payments by 14th December 2023
 Use data available online to investigate which industries are affected mostly by late
payments and whether construction is affected by 31st January 2022.
 Use data available online to see what the best methods are used to avoid late
payments and what can be done to avoid them by 05th March 2021.’ (Rolewicz,
2022)

REVISED RESEARCH QUESTIONS

 Use secondary research to identify what laws and legislations are available for small
companies dealing with late payments by 14th December 2022.
 Use existing data to investigate how long it takes for customers to pay their invoices
by 15th January 2023.
 Use secondary research to identify which industries are affected mostly by late
payments and whether construction is affected by 31st January 2023.
 Find external information regarding what effects late payments have on small
businesses by 16 February 2023.

Page 3 of 18
19054294

BACKGROUND

Late payments can have a seriously adverse impact on a small business, according
to Sage (www.sage.com, n.d.) in 2017, 17% of all payments owed to UK small
businesses were made late, and 9% of those were eventually written off as bad debt.
Small businesses heavily rely on money promised to them by clients to run and
support their business, pay their workers, and pay their rent and bills. Running a
business faces many challenges and receiving late payments can cause
unnecessary problems for the business. Furthermore, not only are many customers
late, but the average wait time for an invoice to be paid is an astonishing 71 days for
businesses with an annual turnover under £1 million GBP and 53 days for
businesses with an annual turnover between £1 and 1.5 million according to
statista.com (Statista Research Department, 2016a).

Page 4 of 18
19054294

FINDINGS

This study focuses on literature found online, in journals and books regarding late
payments. (Barton, 2020) from National Statistics, states that ‘At the start of 2021
there were 5.5 million small businesses (with 0 to 49 employees), 99.2% of the total
business. SMEs account for 99.9% of the business population (5.6 million
businesses)’. This section will provide a general image of the existing knowledge
regarding late payments, here is what you will find in each section:

1.

Page 5 of 18
19054294

LAWS AND LEGISLATION

The legislation is expected to enhance transparency in payment terms while

reducing the instances of late payments (Holmes, 2019). The United Kingdom
introduced the Late Payment of Commercial Debts (Interest) Act 1998, which
requires businesses to pay their suppliers on time. If businesses fail to make
payments on time, they will pay statutory interest and compensation fee that can go
up to 100 euros per invoice (Glover et al., 2019). While these laws demonstrate that
some steps are in place to protect small businesses, late payments remain a
significant problem that businesses face.

MEDIATION
Unfortunately, no matter how hard you try to avoid this there will be that one
customer who don’t pay the invoice on time. It is always best to try speaking to the
customer to remind them, if that doesn’t work you can hire a mediator to help recover
the debt. (McIntosh, 2018a)

LEGAL ACTION
If mediation fails, then you can take your client court. The process involves sending
a final letter warning them that they will have court action if they ignore the letter. The
process can be done without a solicitor if your owed less then £100,000. It bis
important to keep all the communication between you and the customer as this can
be used as evidence. (McIntosh, 2018b). When you send the final letter you can add
interest and any fees you occurred, please see paragraph 2.1.3 regarding interest
fees. (McIntosh, 2018b)

Page 6 of 18
19054294

UK LATE PAYMENT LAW (INTEREST) ACT 1998

The UK Late Payment Law states that businesses have the right to charge interest
on late payments, the law states that payment must be received in the first 30 days
of sending the invoice or receiving the services, whichever is later, though this is only
if specific terms having been set. Businesses can choose to give clients longer terms
if they choose to but if there is no specific agreement in place then the 30-day rule
applies. This law had two main purposes, firstly, to compensate creditors for late-
payments and secondly, to deter late payments. This means that any invoice paid
late could face interest at the rate of 8% above the base lending rate of the Bank of
England, additionally, the business owner is allowed to claim any other reasonable
costs related to collecting the debt (Minarik, 2022).

Page 7 of 18
19054294

HOW LONG IT TAKES FOR CUSTOMERS TO PAY THEIR INVOICES

The most common settlement period is 7 or 14 days. According to the Act on

Payment Dates in Commercial Transactions, the maximum payment date for an
invoice issued to an entrepreneur is 60 days. Such terms are mainly used in the
construction, industrial and manufacturing industries. The invoice payment date
should, above all, be consistent with the form and time of settlement specified in any
agreement concluded between the parties.

According to a survey by Statista:

Below you can see Figure 2, this chart is showing proportion of invoices that are paid
late in 2015 and 2016, the average waiting time for under £1 million GBP is 71 days
in 2015 and 2016 and for £1-5 million the average waiting time is 53 days. (Statista
Research Department, 2016b)

Page 8 of 18
19054294

Figure 2: Proportion of invoices that are paid late in 2015 and 2016 (Statista
Research Department, 2016b)
Many countries struggle with late payments, in the UK late payments continue to be
a problem and a raising problem. Over the years late payments continue to be an
issue even though there have been many attempts to end late payments in the small
business sector.

The second graph (Figure 3) is from The Domino Effect: A study for sage. It shows
the percentage of invoices paid late for all the countries they surveyed.
Unfortunately, UK is among highest percentage countries, a total of 18% of invoices
in the UK are paid late. (Miller and Wongsaroj, 2017a)

Figure 3: Proportion of total invoices that are paid late (Miller and Wongsaroj, 2017b)

Page 9 of 18
19054294

WHICH INDUSTRIES ARE AFFECTED MOSTLY BY LATE PAYMENTS

AND WHETHER CONSTRUCTION IS AFFECTED

Many companies are forced to accept long payment terms. According to

entrepreneurs, every fourth contractor is in arrears with payments, because for him it
is a form of cheap crediting of his business - in this way he avoids taking out more
expensive bank loans. Loans are mainly taken by large companies at the expense of
micro, small and medium-sized enterprises. This has a negative impact on the
operations of the smallest companies (e.g. causes difficulties with introducing new
products to the market, leads to a decrease in turnover and thus profits). However,
they accept this situation because they want to maintain good relations with
contractors who have a strong position in their industries. At the same time,
entrepreneurs who do not receive payment for their goods and services often lack
money to repay liabilities to other market participants.

Page 10 of 18
19054294

Figure 2- Research from Tide reveals UK SMEs are chasing £50bn in late payments
(Penney,2022)
Late payments can severely affect an organization's financial health, particularly
small businesses with limited cash reserves. Late payments can result in cash flow
problems, leaving organizations struggling to cover their operating expenses, push
critical investments, and even drive bankruptcy (Sullivan, 2018). This literature
review aims to understand which industries are affected mostly by late payments and
whether the construction industry is affected. (Penney, 2022)

THE CONSTRUCTION INDUSTRY

The construction industry is one of the industry’s most susceptible to late payments.
According to research conducted by the National Specialist Contractors Council,
small contractors face the most significant challenge in chasing down late payments
(NSCC, 2013). The study found that the construction industry has the lengthiest
payment terms. On average, construction invoices take around 68 days to be paid,
while payment terms can stretch up to 120 days (NSCC, 2013). This delay can have
devastating consequences on small and medium-sized contractors and
subcontractors who require a steady stream of cash flow.

Page 11 of 18
19054294

WHAT EFFECTS LATE PAYMENTS HAVE ON SMALL BUSINESS

According to Xero and PayPal many business owners feel under pressure and have
considered closing their company because of late payments, as much as 37% of
business owners have considered closing their company because of cashflow issues
caused by customers not paying their invoices on time, in fact at least 48% of
invoices issued by small businesses are paid, on average, 14 days late (Staff, 2019).

Several strategies can help prevent late payments. One is setting clear payment
policies and terms and communicating these to customers to reduce disputes and
ambiguity regarding payments. Invoicing software can also automate the invoicing
process, facilitating the prompt billing and payment of invoices (Brown and Ecklund,
2015). Small companies can also conduct credit checks on their potential customers
to assess their creditworthiness and ability to make on-time payments. Companies
can then decide whether to transact and the appropriate payment terms. Finally,
small businesses can encourage prompt payment by incentivizing customers to
make quick payments by offering discounts for prompt payers (Jääskeläinen et al.,
2019).

Late payments can cause significant challenges for small businesses, such as cash
flow shortages that could lead to bankruptcy. A study conducted by the Australian
Small Business and Family Enterprise Ombudsman found that late payments were
the primary cause of business insolvency in the country (Osterwalder and Pigneur,
2010). Similarly, a survey of small businesses in the United Kingdom noted that 23%
of respondents had temporarily stopped trading due to late payments, while 11% had
ceased trading altogether (Leong and Ward, 2018). Late payments have a cascading
effect on small businesses' ability to pay their suppliers and employees on time,
leading to financial distress and business failure.The impact of late payments can
vary depending on the organization's industry and their services or products. A study
by Market Finance UK found that SME's in the construction and manufacturing
Page 12 of 18
19054294

industries are most affected by late payments, with construction suffering the most
significant impact (Market Finance UK, 2019). In contrast, businesses offering
professional services that are invoiced rather than billed, such as accounting or
consulting services, tend to have standard payment terms and are less affected by
late payments.

Late payments can lead to a ripple effect on the supply chain, as smaller businesses
delay their payments to suppliers, resulting in slower deliveries and damaged
relationships (Yen et al., 2020). This can also lead to limited cash flow, limiting the
funds owners and contractors need to take on new projects and meet other
expenses, leading to project delays and ultimately, loss of businesses.

Page 13 of 18
19054294

CONCLUSION

Late payments can have significant repercussions, particularly on smaller

businesses that rely on cash flow to operate. Construction is one of the most
affected industries due to the long payment terms that exist when working with larger
developers. Late payments can lead to cash flow issues, delayed payments to
suppliers, and ultimately, project delays and contract disputes. Organizations should
put procedures in place to monitor these risks and act when they occur. Construction
companies need to establish streamlined invoicing and payment processes and
consider outsourcing payment collections to specialized agencies to avoid late
payment and proactively manage cash flow.

Page 14 of 18
19054294

REFERENCES

Barton, D. (2020). Business Population Estimates for the UK... [online] GOV.UK.
Available at:https://www.gov.uk/government/statistics/business-population-
estimates-2020/business-population-estimates-for-the-uk-and-regions-2020-
population-statistical-release-html#composition-of-the-2020-business-[Accessed 22
Feb. 2022].
GOV.UK. (n.d.). Late commercial payments: charging interest and debt recovery.
[online] Available at: https://www.gov.uk/late-commercial-payments-interest-debt-
recovery/charging-interest-commercial-debt [Accessed 22 Feb. 2022].
Market Finance UK. (2019). Late Payment Report. Retrieved from:
https://www.marketinvoice.com/lp/late-payment-report-2019#utm_campaign=late-
payment-report-2019&utm_medium=button&utm_source=website. [Accessed 22
Feb. 2022]
McIntosh, S. (2018a). How to recover an unpaid invoice. [online] Sage Advice United
Kingdom. Available at: https://www.sage.com/en-gb/blog/recover-unpaid-invoice/
[Accessed 22 Feb. 2022].
McIntosh, S. (2018b). How to recover an unpaid invoice. [online] Sage Advice United
Kingdom. Available at: https://www.sage.com/en-gb/blog/recover-unpaid-invoice/
[Accessed 22 Feb. 2022].
Miller, T. and Wongsaroj, S. (2017a). The Domino Effect: the impact of late
payments. [online] Available at:
https://www.sage.com/en-gb/blog/wp-content/uploads/sites/10/2017/12/Domino-
Effect-Late-Payments-Research-Sage.pdf [Accessed 22 Feb. 2022].
Miller, T. and Wongsaroj, S. (2017b). The Domino Effect: the impact of late
payments. [online] Available at:
https://www.sage.com/en-gb/blog/wp-content/uploads/sites/10/2017/12/Domino-
Effect-Late-Payments-Research-Sage.pdf [Accessed 22 Feb. 2022].

Page 15 of 18
19054294

Minarik, T. (2021). UK Late Payment Law – What You Need To Know in 2022.
[online] brodmin.com. Available at: https://brodmin.com/payments/late-payment-law-
uk/?utm_content=cmp-true.
NSCC. (2013). Late payment in the construction industry. Retrieved from:
http://www.nscc.org.uk/customerfiles/NSCC_Late_Payment_White_Paper.pdf.
[Accessed 22 Feb. 2022].
Penney, S. (2022). A bumper year for Tide: 7% of SME’s now use the business
financial platform. [online] Tide Business. Available at: https://www.tide.co/blog/tide-
update/a-bumper-year-for-tide-7-of-smes-now-use-the-business-financial-platform/
[Accessed 18 Jun. 2023].
Rolewicz, J. (2021). Research Proposal. University of Hertfordshire. Unpublished
essay.
Staff, P. (2019). The impact of late payments on the UK’s small businesses. [online]
PayPal Newsroom. Available at: https://newsroom.uk.paypal-corp.com/paypal-
stories-archive?item=23 [Accessed 22 Feb. 2022].
Statista Research Department (2016a). Average wait for invoice payment by
business size UK 2016. [online] Statista. Available at:
https://www.statista.com/statistics/467578/average-wait-for-invoice-payment-by-
business-size-united-kingdom/ [Accessed 22 Feb. 2022].
Statista Research Department (2016b). Average wait for invoice payment by
business size UK 2016. [online] Statista. Available at:
https://www.statista.com/statistics/467578/average-wait-for-invoice-payment-by-
business-size-united-kingdom/ [Accessed 22 Feb. 2022].
Sullivan, P. (2018). The Heavy Cost of Late Payments. Retrieved from:
https://www.investopedia.com/articles/personal-finance/020315/heavy-cost-late-
payments-both-businesses-and-consumers.asp [Accessed 22 Feb. 2022].
www.sage.com. (n.d.). Impacts of late payments on Small & Medium Businesses.
[online] Available at: https://www.sage.com/en-gb/news/press-releases/2017/12/half-
of-uk-small-and-medium-businesses-expect-to-suffer-impact-of-late-payment-this-
christmas/ [Accessed 22 Feb. 2022].

Page 16 of 18
19054294

Yen, H. R., Chen, C. L., & Yen, H. J. (2020). Rolling Horizon Scheduling for Supply
Chain with Late Payments. Operations Research Trans, 4(1), 71.
‌

GANTT CHART

Page 17 of 18