Half of UK small businesses have unpaid invoices from last tax year

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A survey of 1,000 business leaders conducted by NerdWallet in April 2023 found that many small businesses are awaiting payments from up to six months ago.

Having a consistent flow of money is vital to the running of any business, and interruptions to this cash flow can prove to be a real problem for business owners and freelancers. From being able to ensure that salaries are paid on time to covering bills and expenses, having overdue invoices can significantly impact the smooth running of small businesses.

One thousand small and medium-sized enterprise (SME) owners, decision-makers and freelancers in the UK were surveyed about their experience with late payments and how this has affected their business.

Outstanding pressure

Over half (55%) of businesses still have outstanding invoices from the last tax year (2022/23). This is a problem that seems to be getting worse with time, as just under half (46%) of SMEs were left with more unpaid invoices at the end of the 2022/23 tax year than the previous year.

Connor Campbell, business finance expert at NerdWallet, comments:

“At a time when many businesses across the UK are already facing an extremely turbulent period financially, the stress and uncertainty of unpaid invoices is an additional headache that no organisation will welcome. 

“Our survey found that overdue invoices can have substantial effects on SMEs, causing them to make cutbacks on expenditure, recruitment and even staffing. We were most concerned to see that so many business owners were simply happy to sit back and wait for these late payments without chasing up invoices.

“Of those that did pursue payment, very few opted to charge interest on repayments. Businesses in the UK are entitled to charge interest of up to 8% plus the Bank of England base rate for business-to-business transactions.

“This is an area wherein many businesses could be losing out on compensation for the inconveniences caused by overdue invoices, so it’s important for business owners and freelancers to be aware of the legislation surrounding repayments.”

The majority of invoices had not been left unpaid for a long period of time. A third (35%) were less than a month overdue, with just over a quarter (27%) being between one and three months late. Shockingly, however, a fifth (20%) of business owners said they had outstanding invoices from four to six months ago.

Inaction has consequences

These late payments can have significant repercussions on the running of a small business. Asked what measures they had taken in response to unpaid invoices, 39% of SMEs said they had either already, or thought they might have to, make reductions to their overheads. 

This included actions such as downsizing office spaces and moving to remote working, alongside cutting team social spending budgets.

Recruitment also took a significant hit, with 28% of SMEs pausing their recruitment efforts due to having unpaid invoices. Additionally, a fifth of business owners said they had frozen planned pay rises for their employees.

Unfortunately, the survey also found that 22% of small businesses had made, or might have to make, staff redundancies to compensate for their late payments.

The survey revealed that, in most cases, business owners typically waited a week before taking action for unpaid invoices. 

In terms of how they went about chasing payments, half said they sent reminders every week until invoices were paid, while a quarter said they pushed for payment every day.

An additional 40% of SMEs followed up failure to pay with a phone call or letter. 

Interestingly, only 23% of respondents told NerdWallet they charge interest on top of the agreed amount for each reminder, while only one in ten (11%) said they claimed debt recovery costs.

Surprisingly, 14% of businesses had to use a debt collection agency to receive payment, while 8% said they had been forced to write off the invoice altogether. Perhaps most shocking of all was the revelation that 22% of small business owners were happy to wait and do nothing while the client remained unpaying.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.

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