A new report from ACCA (the Association of Chartered Certified Accountants) has found that the culture of late payment among businesses inhibits the ability of the UK’s smallest organisations to take on more employees.

Charlotte Chung, ACCA’s senior policy adviser on SME issues, said: “Microbusinesses and other small enterprises are less likely to increase headcount when faced with late payment. Compared to large corporates, we found that the effect of late payment on small businesses who want to expand was significantly greater, by 54 per cent and 47 per cent respectively.”

The report found that businesses with fewer than 50 employees are typically twice as likely as large corporates to report problems with late payment.

The report points out that late payment by suppliers adds to costs and reduces capital expenditure and can even lead to suppliers going out of business. 

Read more about late payments:

• The impact that late payments have on small firms is devastating
• We need to combat “entrenched late payment culture”
• “Late payment culture set a boardroom level”, says MP

There are, however, strategies to deal with the cash flow problems that late payment can create.

“There are a number of steps that SMEs can take to improve their strategies towards cash flow,” says Alan Gillies, sales VP, American Express Global Corporate Payments UK.

“First, SMEs can look to other short-term sources of credit such as third party payment providers or electronic payment solutions,” he explains. This allows SMEs to defer payment and stay on top of their outgoing payments. It also helps to drive commercial growth prospects, as improved working capital gives the SME the opportunity to buy more and in turn, sell more.

He adds: “Furthermore, automating expense systems – having employees use online expense management systems rather than manually entering their expense claims – may help SMEs to have greater visibility on expenses, because SMEs can track recurrent trends in expenditure. Having identified any areas with inconsistent or high costs, SMEs can use this information to negotiate better rates with suppliers or Travel & Expense policy providers going forward.”

SMEs must now be more focused than ever on their business spending, argues Gillies. “By establishing better working capital management strategies, they can free up much-needed liquidity – which can in turn be re-invested into growth initiatives – and benefit from the upturn in the economy.”

There are also an increasing range of options aimed at bridging the gap between late invoices and immediate expenditure. Raising cash through invoice financing, where companies use their outstanding invoices as security to borrow or sell them to a factor who will collect the debt has grown significantly among SMEs over the last few years, according Finance Leasing Association. One company, Tandem Invoice Finance saw a doubling from 2012 to 2013 take-up of its Selective Invoice Finance products from businesses with a turnover up to £1,500,000.

Read more about asset-based finance:

• Considering seed funding? Take a look at your invoice instead
• The promise and pitfalls of asset finance

But there are other ways to raise funds to maintain cash flow, without looking for an overdraft, according to David Banfield, president of The Interface Financial Group, which has more than 40 years’ experience in invoice discounting with a franchise base in nine countries.