400,000 small firms threatened by late payment as costs surge, new study finds

• Small Business Index (SBI) shows a third of small firms impacted by poor payment practices in recent months
• Bulk of exporters report flat or falling international sales as full import checks take effect
• Cost pressures hit seven-year high as Federation of Small Businesses (FSB) urges government to tackle surging costs and arrest decline in confidence

The UK’s largest business group is warning that a worsening of the UK’s late payment crisis, high inflation and mounting admin for firms that trade internationally will cause the business community to further shrink in size if left unaddressed, as it releases fresh findings from its quarterly SBI.  

The new study of more than 1,200 business owners finds that close to one in three (30%) has seen late payment of invoices increase over the last three months, with a further 8% experiencing other forms of poor payment practice. Only 6% say that a change in payment terms has been agreed over that period.

As a result, approaching one in ten (8%) say late payment is now threatening the viability of their business. Latest government statistics show that there are an estimated 5.5 million small business in the UK – a figure which fell by 400,000 over last year’s lockdowns. The new FSB study suggests that a similar number of firms (440,000) could be forced to close again this year due to late payment alone.

The headline UK SBI measure of confidence has dropped to -8.5 in Q4, during another uncertain festive season. The figure has fallen every quarter over 2021, having stood at +27.3 in Q1. More small firms now expect their performance to worsen over the coming three months than expect an improvement. Pessimism is especially pronounced in the retail (-40.3) and accommodation and food (-33.0) industries.  

The vast majority of small businesses (78%) say costs are rising. The figure is at a seven-year high.

Inputs are most commonly cited as a primary cause of that increase, with half (49%) of those surveyed flagging it as a main driver of higher outgoings. Fuel (46%) and utilities (45%) were the second and third most highlighted primary causes of rising costs respectively. All figures are at their highest levels since Q4 2014.

Elsewhere, with full import checks and rules of origin requirements now in place for firms which do business in the EU, the bulk (74%) of small exporting firms report that international sales were flat or falling over the past quarter. Close to one in four (38%) of these firms report a decrease in exports. Previous FSB research shows that only one in four small importers are fully prepared for new import checks.       

FSB National Chairman Mike Cherry said: “The small business community diminished in size over the past year and, unless action is taken now to tackle the challenges it faces, history is set to repeat itself.

“After another frustrating festive season, small firms are facing flashpoint after flashpoint. Today, it’s a fresh wave of admin for importers and exporters – in three months’ time it will be a hike to the jobs tax that is national insurance contributions, a rise in dividend taxation, business rates bills and an increase in the national living wage. On top of that, operating costs are surging – many will soon be trying to strike energy deals without the clout of big corporates or the protections afforded to consumers.   

“Small business confidence dropped in every quarter of 2021. As we head into the New Year, the government needs to act now if we’re to reverse that trend and secure an economic bounce back.  

“Late Payment was destroying thousands of small businesses even before the pandemic hit – the pandemic has made matters worse. In the past, the Government has rightly identified greater Board accountability as key to spurring change in this area, but delivery has been slow. We responded to its consultation on extending the Small Business Commissioner’s powers more than a year ago, but have yet to see a response.

“The pandemic is absorbing bandwidth, and rightly so, but policymakers need to understand that late payment is the issue that keeps thousands of entrepreneurs up at night, and one that has worsened in lockstep with lockdowns. We need to see words turned to action.

“Every big UK corporation should have a non-executive director on its board with direct responsibility for payment culture. And every big business and government organisation should be abiding by the prompt payment code: 30-day payment terms are not a nice to have, they’re the norm for those who are committed to environmental, social and governance best practice.         

“If this government is serious about levelling-up, it needs to get serious about helping community businesses struggling to make ends meet as costs surge. Increasing the small businesses rates relief ceiling to £25,000 would take 200,000 more firms out of this regressive tax altogether, primarily in levelling-up target areas, meaning more investment, recruitment and retention within local economies up and down the country.

“Equally, with the omicron variant hammering consumer confidence, April’s tax hikes are looking increasingly misjudged. The Chancellor should look again at how to protect small firms from this fresh blow. An increase in the Employment Allowance would provide some breathing space.

“Small firms that do business internationally are usually among our most profitable and innovative. That’s why it’s so hard to watch so many becoming increasingly weighed down by bureaucracy. The Government should learn lessons from the botched roll-out of the SME Brexit Support Fund and launch a new fund with similar aims but more sensible eligibility criteria, reasonable application deadlines and a genuinely international focus.”