How do late payments impact small businesses?

Just under a year ago, Open Banking gathered a group of leading fintechs (including us at Fractal) and the UK Small Business Commissioner, Paul Uppal, to discuss an ongoing issue that significantly affects small business owners and their cash flow - late payments.

Although the Open Banking roundtable took place over a year ago, the problem has continued to grow in the UK, where the late payments culture is prevalent. 

Uncertainty around payments can be detrimental to a small business owner who relies heavily on promised money from their customers to support their monthly costs such as payroll, utility bills and rent. In some cases, late payments can be the sole difference between business as usual, or going bust.

Throughout the discussion, everyone spoke about potential solutions that can help solve or mitigate the growing issue, and a year on, there may be no better time than now to reimagine the transformation of the late payments culture we have in the UK, today.

In this blog post, we will explore:

  • How late payments affect small business owners and the economy.
  • What can be done to fix the late payments problem that persists today.

How late payments affect small businesses and the economy

According to Sage in 2017, 17% of all payments owed to UK small businesses were made late, and 9% of those were eventually written off as bad debt.

The latest figures from retail payments authority Pay.UK show that the balance of outstanding late payments almost doubled to £23.4bn in 2019. Furthermore, the average wait time for unpaid invoices grew from 12 days in 2018, to 23 days in 2019.

The findings follow previous research from Pay.UK, and FSB that shows the UK late payment crisis could lead to the closure of 50,000 small businesses a year at a cost of £2.5bn to the economy.

How late payments affect small business owners

To add to the many challenges of running a business, receiving late payments from customers can cause unnecessary worry and stress.

As many business owners will tell you, it’s not easy running a business, especially with the amount of time, effort and personal resources put into it. 55% of business owners surveyed in a 2018 ‘Mental Health in Entrepreneurship' survey stated that running a business has had a negative impact on their mental health.

At Fractal, we have heard directly from small business owners that they tend to rely on blogs for advice when running into cash flow problems, and end up taking out loans that are not suited to their individual needs.

With small business owners having to deal with the stresses brought on by financial worries, it’s about time to start thinking about how to help fix the cause, and not simply deal with the symptoms of turbulent cash flow caused by external factors.

What can be done to fix the late payments problem that persists today

Some ideas that were discussed at the roundtable included financial literature, and a SME ‘Trustpilot’ score. The aim of this would be to help SMEs understand the risks they are taking when they work with external corporations by increasing visibility on who tends to pay late, or on time.

Open Banking has also changed how financial institutions create financial products and services. Small businesses tend to be multi-banked, so having a clear view of their financial data could be helpful, plus the ability to get personalised insights (for example, alerting small businesses about potential late payments), and meaningful products and services to help them with cash flow.

How Fractal envisions helping small businesses with late payments

At Fractal, we have a suite of APIs that anyone can build financial products and services upon to better serve small businesses.

By aggregating Open Banking and accounting data, financial institutions can use Fractal’s APIs to show SMEs a single view of their current and future cash flow, send insights on late payments, and suggest contextual financial products to cover dips caused by late payments. Anything offered will suit the business’ unique needs, in a timely way.

Solutions exist for small businesses looking to solve their invoicing, payments and funding challenges, yet all three parts are disconnected.

Leveraging our own APIs, we are in the early stages of creating a ‘Smart Invoicing’ solution that will radically change the way small businesses send and receive invoices through their banking apps. 

We believe that this will help financial institutions to start fixing the causes of late payments (with incentives to pay early and nudges by using behavioural science, gamification and AI) for their SME customers. 

If you want to find out more about our ‘Smart Invoicing’ product, you can contact us here.

The current SME landscape - a recap

The UK SME market is huge.

In 2019, the House of Commons published a paper on the number of SMEs operating in the UK over the past 10 years and found:

  • In the UK, 5.9 million businesses are in the private sector up by 200,000 the previous year.
  • There were 2.4 million more businesses in 2019 than in 2000, which adds up to an increase of 69% over the whole period.

Now more than ever, it is vital for us all to remember the big contribution small businesses make to the UK economy. The Federation of Small Businesses (FSB) estimates that SME turnover in the UK is £2.2 trillion, and states that SMEs employ 16.6 million people in the UK, accounting for 60% of all private sector employment.

Yet, SMEs are still not given the financial assistance they need. According to the Bank of England, the current funding gap for small businesses in the UK is estimated to be at around £22 billion, exacerbated by the banks’ inability to service the sector efficiently.

Challenger banks have been attempting to change the status quo around SME banking (Tide stated that last year that they were able to secure 1% of the SME market through their banking platform), yet traditional banks continue to have the stronghold on the SME banking market.

Even though banks have the majority of the SME market, that doesn’t mean small business owners are happy with the services they are receiving. According to YouGov, almost 47% of SMEs don’t think that their banks are proactive enough at keeping them updated on matters that affect them. This includes help to bridge funding gaps caused by late payments, help understanding their cash flow, and help with better access to finance to grow.


If you're a financial institution, and would like to get involved, get early access and provide feedback, then we would love to chat to you.

You can book some time to talk to one of our team members by emailing us at info@askfractal.com, or you can sign up through our contact form.

In the meantime, don't forget to sign up for our developer portal!