Late payments cause long‐term supply chain disruption
The UK’s late payment culture is putting pressure on business supply chains, as smaller firms struggle to overcome financial woes resulting from the insolvency of others.
More than 4,300 businesses entered insolvency in the third quarter of 2018, but the domino effect means thousands more faced financial issues too.
In instances were contractors, sub‐contractors or their sub‐contractors are paid late, the impacts are felt throughout the supply chain.
An average of ten other businesses can experience bad debt as a result of an insolvency or financial issue further up the supply chain, according to Coface.
And the issue is magnified among small and medium sized businesses as they often lack the resources to overcome the financial burden, especially when compared to larger firms.
This is showcased by figures from insolvency and restructuring trade body R3, as 38% of firms with a turnover of £5 million to £24.9 million reported a negative impact on their finances following the insolvency of a customer, supplier or debtor, compared with 30% of larger firms in the summer of 2018.
Unpaid invoices are thought to be a leading factor in a quarter of bankruptcies, while contractors are unlikely to be paid when assets are sold off as part of an administration or liquidation process, simply because there are other obligations for insolvency practitioners to meet first.
Secured creditors and preferential creditors take priority in insolvency cases, with unsecured creditors such as HMRC, suppliers, contractors and landlords following.
HMRC time to pay services are also available to support businesses with tax, VAT and PAYE financial issues in order to ensure that a business meets its liabilities.
The key for businesses is to closely watch their finances and to take action at the first sign of potential trouble – this often increases the number of potential insolvency and restructuring methods that are available.
By Phil Smith
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