Payment terms and late payments: how do you compare to the average?
How long do you wait to get paid? And how do your own experiences with invoice payments match your peers? Are your customers keeping you waiting longer than average to pay what they owe? Has coronavirus impacted the time it takes to collect payments?
We commissioned YouGov to ask 573 small businesses senior decision makers and sole traders about their credit control experiences. We wanted to understand the terms that businesses are offering, as well as the reality of when invoices are actually paid – and how these factors vary across different industries.
Table of contents
- Why are late payments important?
- Key findings
- What are typical small business payment terms?
- How long do small businesses wait to get paid?
- How do late payments vary by industry?
- How has the Covid-19 pandemic affected late payments?
- Can I change my payment terms?
- How do your payment terms compare?
Why are late payments important?
Late payments are a perennial problem for most businesses. They are often seen as just an unavoidable part of doing business. But late payments are an expensive risk that can make progress and growth difficult. Finding ways to shrink the gap between raising invoices and getting paid is an important part of managing cash flow, and a process that can fuel innovation, invention and expansion.
As the UK government noted in their advice on the EU’s Late Payment Directive: “Late payments constitute a major obstacle to the free movement of goods and services and can substantially distort competition. The resulting administrative and financial burdens impede trade and increase costs. Small and medium-sized enterprises (SMEs) are most vulnerable.”
We also wanted to explore whether coronavirus, and the various financial and operational challenges it has created, has impacted the ability of organisations to pay promptly.
Let’s explore the findings, see what we can learn from these results, and consider what it means to you and your small business. In this article we’re considering a few key questions:
- What are typical small business payment terms?
- How many small businesses are paid late?
- How long do small businesses wait to get paid?
- How do payment terms vary by industry?
Before we answer these 4 questions, let’s look at some of the headline findings from our analysis.
The big story is that most small businesses are waiting a long time to get paid. Another surprise is that giving your customers 30 days to pay does not guarantee that they will pay you within that window; you may still have to chase payment once that period has lapsed.
- Giving generous credit terms does not improve your chances of getting paid on time
- 17% of small businesses require some form of deposit, or full payment, before starting work
- 36% of small businesses wait between 30 and 90 days to get paid
What are typical small business payment terms?
Payment terms vary wildly. While some businesses are insisting on full payment before they lift a finger (10% of respondents) there are others who only send invoices when the work is completed and allow an additional 90 days of credit before demanding payment (just 10%).
The most popular payment policy, according to the 573 small businesses surveyed, is invoice on completion, with 30 days to pay. 30% of our respondents rely on this classic formula to get paid. 17% are demanding payment immediately on completion.
Aside from 30-days and cash-on-receipt, there are a huge range of payment terms offered. This might be because there is no legal or commercial standard when it comes to payment terms. There are some rules on payment terms, which we’ll mention shortly, but every business is (theoretically) free to dictate their own payment terms.
And as we can see from these results, businesses specify a huge variety of payment terms. How do businesses decide what terms to offer? Their chosen terms might be the norm for their industry, a preference of the finance director, an accident of administration, an act of habit, a financial necessity or an inspired deviation from the norm.
Some companies don’t have much choice when it comes to payment terms; you may find that your customers dictate how and when they pay. This is particularly true when dealing with large corporations, who have rigid accounts processes and a lack of flexibility around accommodating atypical payment terms.
Companies with very in-demand (or unique) products and services may have more power to dictate their own terms, and may be able to resist pressure from corporate giants to conform to 60- or 90-day payment terms.
EU payment term rules
The UK currently operates under the EU late payment directive, which was created to encourage prompt payment and reduce the culture of late payments. The directive allows organisations to agree their own payment terms, but defines 60 days as the maximum and 30 days as a default when no terms are agreed elsewhere.
This does not mean that 30-day payment terms are required or expected, just that they are the fallback option when no other terms are defined.
And while 60 days is the maximum, companies are free to agree longer terms, providing the terms are not ‘grossly unfair’ to the supplier.
With Brexit imminent, there is a chance that the UK government will review these guidelines, but this seems unlikely given the huge range of legislation up for review, and the lack of urgency or demand for new payment rules. Additionally, the British government seems to recognise the economy-dampening effect of poor payment hygiene, which would suggest the rules are here to stay.
How long do small businesses wait to get paid?
Most small businesses experience some volume of late payments. On average, 16%* of small business invoices are paid late – or 1 in 6.
Retail is the top performer with just 11%* of invoices paid late. IT & telecoms and construction professions experience more than 20% late payments – or 1 in 5. At the most extreme, small businesses operating in the IT & telecoms sector have average payment terms of 36* days, with payments arriving, on average, 12* days late. To calculate “actual average duration until invoice payment”, ‘average standard payment terms’ was added to ‘average late payment duration’.
Ordered by rank for actual* payment terms (average payment terms + average late time):
Again, the gap between work being completed and payment being received varies significantly between industries. At the most extreme, Tide calculated that small businesses operating in the IT & telecoms sector have average payment terms of 23* days, with payments arriving, on average, 12* days late.
Other industries near the bottom of the table paint a similarly grim picture. Manufacturing and Media (including marketing, advertising, PR & sales) also exceed 30* days on average. The most efficient industry is Retail, managing to get paid within a 12-day window.
How do late payments vary by industry?
As we have seen from our analysis, payment terms and late payments do vary by industry. The difference between the fastest payers and the slowest is significant and, frankly, shocking.
Small businesses in the retail industry have the shortest payment terms and the shortest late payment duration. So as well as offering short credit terms, retail businesses benefit from fewer late payments.
Perhaps the differences here are partly explained by industry norms and practices, but at first glance it looks as though giving longer credit terms does not mean that your customers will pay you promptly. The opposite seems to be true.
Could it be that, when customers have a month or more to pay, they feel no urgency to process your invoice, and simply add it to a dusty pile? But when you demand payment on receipt, or within a few days of invoicing, your customers know they must act quickly to get you paid on time…?
This is an interesting observation for any organisation struggling with late payments. If the reality is that longer payment terms encourage late payment, you may need to rein in your standard terms just to accommodate the inevitable late payers. And perhaps your business plan needs to account for the number of customers who will pay late. You might think that your business can afford to give 30 days’ credit, but if 15% of your invoices are paid 15 days late, how does this impact your ability to pay salaries, suppliers and taxes?
How has the Covid-19 pandemic affected late payments?
On the coronavirus front, it seems as though the pandemic may have had a slight impact on profitability and turnover, but the effect on late payments is less clear.
A 2018 study by MarketFinance found that the average late payment was 12 days, increasing to 23 days in 2019. The same report found that 43% of invoices were paid late in 2018, falling to 39% in 2019. These numbers, on their face, seem generally worse than our results from 2020, which may be explained by our different respondents, or it could point to a general improvement in credit control and a shift in our late payment culture.
Can I change my payment terms?
Speaking legally and theoretically, yes, you can change your payment terms.
There are a few factors to consider first, including:
- Acceptability. How standardised are payment terms in your industry?
- Customer size. Large corporations will have their own default terms and conditions, which may be difficult or impossible to deviate from. Are you willing to lose their business – or to adapt to their own terms?
- Existing relationships. How many existing customers do you have, and how much do they rely on your current terms? Any change to your commercial terms must be communicated, clearly, ahead of any change. If your invoices represent a significant part of your customer’s expenditure, you may need to speak to them directly to negotiate any change.
How do your payment terms compare?
Late payments are a blight on businesses. And the problem often becomes a cascade of extended credit. When one company delays payment, their suppliers struggle to pay their suppliers and salaries. And those suppliers struggle to pay their suppliers.
Perhaps the biggest takeaway from this research is that giving generous credit terms does not improve your credit control. In fact, it mostly has an inverse relationship; the longer your credit period, the bigger the payment delays, and the longer you wait to get paid.
It’s not always easy to change your credit terms, but you can certainly reassess what you’re doing and consider if it is good for your business and good for your customers.
You may not be able to change all your credit agreements overnight, but you can certainly make gradual changes to improve your cashflow and the security of your business.
All figures and calculations, unless otherwise stated, are from YouGov Plc. Total sample size was 573 senior decision makers in small businesses. Fieldwork was undertaken between 14th – 16th September 2020. The survey was carried out online. The figures have been weighted and are representative of British business size.
Industry data for “average standard payment terms” is based on MAIN job industry only, whereas the other metrics (“average late payment duration”, and “average percentage of invoices paid late”) are based on SELECT ALL THE APPLY job industries.
Where an asterisk (*) is present, the calculation was completed by Tide. To calculate average payment terms, the median for each option was taken, except where payment (partial or full) was received before work begun, in which case 0 days was allocated. To calculate “actual average duration until invoice payment”, ‘average standard payment terms’ was added to ‘average late payment duration’.
The following industries were disregarded from the findings due to a low sample size for the specific data split (under 50 respondents) – see below for count information:
Medical and Health Services – 36
Hospitality and Leisure – 29
Legal – 22
Education – 21
Real Estate – 19
Transportation and Distribution – 12
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