Late payment is one of the biggest issues facing small businesses in the UK, and the problem is especially pronounced for freelancers and contractors.
With shallower pockets than larger businesses, a single delayed invoice can mean serious financial problems for a one-person company.
Most freelancers have developed coping mechanisms for the pain of late payments. A cast iron invoicing process, late payment penalties, invoice finance and reputable debt collection agencies are all useful tools for a freelancer’s credit control arsenal.
Late payments are a problem that needs fixing, and the Government knows it. The Conservatives have promised to establish a Small Business Conciliation Service to mediate late payment disputes, and recently concluded a consultation into unfair payment terms.
Despite late payments running rampant across the country (BACS reports that SMEs are spending £10.8 billion a year chasing late payments, up from £8.2 billion in 2014) it might surprise many long-suffering small business owners to learn that UK payment times are below the average for Europe.
According to data collected by Intrum Justitia Europe’s average contract terms are 31 days, but in the UK are 25 days. Despite the 2013 introduction of the Late Payment Directive, a piece of EU-wide legislation designed to standardise payment terms across the continent, the credit control map of Europe is a diverse one.
Eastern Europe proves to be remarkably adept at settling invoices quickly, while southern Europe adopts a more relaxed attitude towards commercial debt. Could it be all that sun, or is there something else at play?
You may have experienced some interesting business customs if you trade abroad – gifts from Asian clients or meetings in saunas with Scandinavian business partners – and the similar customs exist around payments.
While many UK businesses rely on the stick to enforce payment terms, the carrot is employed much more frequently in European transactions. European credit controllers told us gifts are sometimes sent to accounts departments as a thank you for prompt payments, and many businesses will offer a discount in exchange for prompt payment.
It works like this: You issue an invoice with a note telling the customer they can deduct a small percentage (commonly 2-3%) if they pay within 14 days. Eager to save their boss a bit of cash, the bookkeeper hurries your invoice through, and you get paid sharpish in exchange for a few Euros.
This credit control method is widespread across Europe – the Germans call it a sconto or rabat, the Dutch call it a korting, in France it’s known as an escompte, and Italians call it an abbuono.
Although little-used in the UK, this kind of reduction is known as a prompt payment discount.
Although prompt payment discounts anecdotally help speed along payment, it’s hard to back that claim up with any data as it is not a standard business practice. In fact France and Italy are distinctly average when it comes to settling invoices.
The real test of country’s credit control mettle is how they deal with an overdue invoice. Do they calmly sort the payment out in less than a week (like Finland and Norway), or do they panic and struggle to make payment inside a month (looking at you, Portugal and Slovenia)? Again, there are interesting regional variations.
It’s very difficult to deduce what factors contribute to overdue payments in each country, but we can look at other economic features which might influence how quickly overdue payments can be processed. Technical infrastructure and the adoption of modern, online services seems to be a major contributing factor.
Finland, Sweden and Denmark spend the largest percentage of their GDP on Research & Development, and all three countries are in the top 5 in terms of settling overdue payments. Similarly Croatia, Latvia and Cyprus spend among the least in Europe on R&D (all less than 1% of GDP) and are in the bottom 7 countries for dealing with overdue payments.
Adam Earl of credit control experts Safe Collections thinks the adoption of the latest technology can help speed up payments – and a reliance on traditional methods can definitely slow them down:
“An increase in the availability of faster secure payment options will certainly help, but late payment has been an issue as long as selling on credit has existed. Even in an age of instant access to funds many companies still cling to slower methods of payment, either out of fear of the unknown or, increasingly, as yet another way to delay timely payment.
“The most obvious throwback to the bad old days that still remains in use today is the cheque, a method of payment that is by our reckoning twenty years past its best before date.
“Without doubt the new breed of mobile and cross border payment solutions [are speeding up payments], most notably Transferwise. The ability to let your debtors make payment instantly will encourage good payers to pay even quicker, and will remove many of the excuses from those companies that refuse to pay on time.”
At the end of the day invoice payment times are as different as the companies making them – some will be painless, others will cause you no end of grief. Know the country you’re operating in, know your client, and get a bulletproof credit control process in place.
And if you can do business in a country that spends upwards of 3% of its GDP on Research & Development, you certainly won’t be hurting your chances of getting paid on time.