Those are worrying figures, especially when you consider that businesses affected by late payments spend an average of 86 hours a year chasing money they’re owed. That’s a huge amount of time.

It’s understandable, then, that the government wants to crack down on poor payment practices. Smaller businesses shouldn’t have to spend weeks chasing customers for money they’ve already earned.

But there’s another problem that doesn’t get nearly as much attention: Even when customers pay exactly when they’re supposed to, businesses can still find themselves struggling to pay for their next order.

And in my experience working in trade finance, that’s often where businesses run into problems.

A good order book doesn’t mean there’s money in the bank

Imagine a UK distributor that has just secured a £500,000 order from a retailer. The customer is reliable, the margins make sense and there’s every reason to expect the order will be profitable.

But the distributor needs to buy the goods first.

Its overseas supplier wants a deposit before production and the rest before shipping. Once the goods arrive in the UK, the retailer has another 90 days to pay.

By the time the money comes back, 6 months may have passed. Now imagine the retailer places another order before settling the first invoice.

The distributor has the opportunity to increase its sales, but it needs to find another big chunk of money to pay its supplier in the meantime. Meanwhile, a lot of its available cash is tied up in the order that is still going through.

This is something I think gets overlooked in conversations about business growth. We tend to focus on sales, new contracts and customers, without asking how companies are supposed to pay for that growth.

With how supply chains work at the moment, the sad reality is that a business can appear to be profitable on paper, but still struggle to afford its next shipment.

The cost of waiting

When businesses have money tied up in unpaid invoices, it affects the whole operation.

The company may miss the chance to buy stock at a lower price because they can’t commit to a big order, they might miss a supplier’s production deadline or have to pay more to expedite the creation of goods at short notice.

If they can’t get materials or stock in time, they may struggle to meet delivery dates agreed with their own customers. Depending on the contract, that can mean penalties as well as damage to the relationship.

And when one company starts paying its suppliers late because it’s waiting for its own customers, the problem spreads.

Government research estimates that late payments contribute to around 14,000 business closures each year. That’s a serious problem, and stronger rules around payment practices are definitely what we need.

But we also need to recognise that long payment terms and late payments aren’t the same thing. A customer who pays on day 90 under an agreed 90-day contract hasn’t paid late. But the supplier may have spent months funding the order before receiving a penny.

For manufacturers, importers and distributors, that can be just as difficult to manage as an overdue invoice.

Businesses need to think about both ends of the transaction

Having previously worked as Head of Sales at a trade finance lender, I’ve seen how much difference the structure of a deal can make.

One business might have plenty of money set to be paid to them by customers, but not enough cash available to buy its next shipment. Another might have a confirmed purchase order but need to pay its supplier before production can start.

Those businesses have different problems, even though both are short of capital.

Invoice finance can help with the first, allowing businesses to access some of the money owed to them before customers pay.

Trade or supplier finance can help with the second, providing funding to pay suppliers to fulfil orders. In some cases, businesses may need a combination of the two.

Of course, finance isn’t automatically the answer. Businesses still need to look at their margins, the cost of borrowing and how confidently they can expect customers to pay.

I’d also encourage companies to negotiate payment terms before accepting big contracts, rather than assuming they’ll find the money later.

A deposit from a customer, staged payments or more time to pay a supplier can make a real difference. But where those options don’t exist, it’s worth understanding what else might be possible before turning down an otherwise profitable order.

Better payment rules are only part of the answer

The government’s proposed reforms, including plans to limit payment terms imposed by large businesses on smaller suppliers, are a welcome start. Nobody should have to chase an invoice repeatedly just to receive money they’re contractually owed.

But I don’t think we should treat faster payments as the complete answer to Britain’s working capital problems. For many businesses, the difficulty starts before they’ve even issued an invoice.

They need to pay for stock, materials and production, sometimes months before the finished items reach their customers.

As those businesses grow, the amount of money they need to keep going grows with them.

We should be encouraging companies to win bigger contracts, find new customers and expand into new markets. But we also need to recognise that every new order has to be funded. Otherwise, we risk leaving businesses in the strange position of having more work than ever, but not enough cash to take it on.

Declan Burton-Clark is Director and Trade Finance Specialist at Plutus Business Finance, a whole-of-market commercial finance broker working with more than 100 UK lenders. He previously served as Head of Sales at a trade finance lender.

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