Small businesses are incredibly resilient, but they are facing some serious challenges. Despite employing just over three-fifths of the UK’s total workforce and contributing over £2 trillion in turnover, they are bearing the brunt of the UK’s latest financial predicament – a cost of living crisis underpinned by soaring inflation and energy bills.

Government support schemes have so far only scratched the surface in terms of the help these firms need. The challenges during this period have also exacerbated a perennial issue – large businesses are paying their suppliers far too late for their products and services.

A recent Xero recent study found that over half (55%) of large organisations have admitted to paying their small suppliers later than the agreed payment terms. It has also been reflected in Xero’s Small Business Index, with the average time taken for small businesses to be paid rising from 28.8 days in 2021 to 30.4 days in July 2022.

This contributed to almost a quarter of UK small businesses experiencing more than six months of negative cash flow in 2021 – periods when monthly expenses exceed revenues.

Breaking this cycle will require a concerted effort from governments, big business and industry bodies to step up and help a fundamental pillar of the UK economy. But while much of the effort to date has been placed at digging small businesses out of a hole, perhaps it should be targeted at those responsible for digging it.

It’s time to balance the scales

Some small businesses have already taken steps against big organisations guilty of late payments, with 65% of offending larger enterprises admitting that legal action had been taken against them.

However, taking a stand is not without risk. Many business owners and operators have to consider whether arguing for what is theirs is worth the potential impact on a relationship with a key customer.

Sadly, this is a feeling not reciprocated by many working with small business suppliers; 78% of them said they are aware of delayed payments and their potential impact, yet continue to do it anyway.

So, large businesses fully understand the importance of paying suppliers on time. In fact, timely payments were deemed important to more business decision-makers (76%) than consistent revenue growth (73%). This is because it can affect wages, cause expenses to mount, and push owners to use their own personal savings to keep companies afloat. Unfortunately, their understanding has not led to action.

As such, it is vital that large businesses change their perspective on late payments. The government can start this process by enforcing more transparency in regulation and reporting and strict penalties for those who consistently pay late.

While these actions may help, they will likely take some time to implement and become effective. In the meantime, we also need to change the nature of the conversation around late payments to influence business attitudes to the issue.

The power of language

First, we can reassess the language we use. The term ‘late payments’ fails to communicate the urgency of the problem for small businesses and can too easily be used to legitimise poor practice.

Instead, we should call it what it is: unapproved debt. This is a more accurate description of what happens when small businesses are saddled with debt they did not ask or plan for because their customers do not pay what they owe.

Our study found that more than four in five (81%) large businesses would be more likely to pay their suppliers on time if late payments were renamed as ‘unapproved debt’. This terminology change is one of the recommendations we put forward as part of our UK-wide late payments task force – a coalition of experts, academics and business leaders – which presented their findings to the UK government and other industry bodies last year.

We need to force big firms to think differently, and something as simple as reframing late payments as ‘unapproved debt’ can be a catalyst for this.

A change of culture

Environmental, social, and governance (ESG) has rightly become a huge factor guiding how businesses operate and report on their activity. So why can’t late payments be included in this?

As much as a potential recruit could judge a company based on its impact on the environment, they should also consider how partners and the supply chain are treated. After all, a lot can be gleaned by a company’s refusal to pay its small suppliers on time.

Businesses that want to attract the brightest and best can hopefully be compelled to improve the time taken to pay their smaller suppliers. If they don’t, they will begin to fall behind their competitors that offer prompt payments.

At a time in which small businesses are facing an extraordinary amount of economic pressure, it is crucial the government and large businesses do what they can to alleviate this financial burden.

Removing unnecessary cash flow barriers such as chasing up payments can allow owners and operators to focus on remaining profitable and supporting their employees. Entrepreneurs have shown immense strength in facing this problem so far. Now it’s time for others to step up, and help them get paid on time.

Alex Von Schirmeister is UK Managing Director, Xero