How Regulators May Help Curb Late Supplier Payments

Late payments may be the talk of the town in the U.K., but in the U.S., the issue of late supplier payments remains a silent threat to many SMEs, too. The latest research from alt lender and cash flow management platform Fundbox, released last week, made that threat abundantly clear.

Earlier analysis from Fundbox revealed that an estimated $825 billion remains unpaid in supplier invoices across the U.S. Its latest report found that 79 percent of small business owners can’t pay themselves because they are getting paid late by their corporate buyers.

Nearly a quarter said they can’t hire new employers or invest in new equipment, and a fifth have been forced to halt marketing efforts. Delaying employee pay increases and bonuses, as well as preventing inventory buildup, are also knock-on effects of late payments, Fundbox found.

According to the company, these statistics highlight the particular struggle of small business cash flow.

“Ask any Fortune 500 CEO what they’d do if faced with a cash flow crunch,” Prashant Fuloria, chief product officer at Fundbox, recently told PYMNTS. “You’ll hear things like ‘freeze hiring’ or ‘cut marketing programs,’ but you won’t expect any executive to take a personal pay cut in order to conserve cash.”

“Surprisingly,” the executive continued, “and somewhat sadly, the number one action that small business owners do when cash flow is tight is forego paying themselves.”

Fundbox is in an interesting position when it comes to late payments, as are other lenders: While late supplier payments can cripple a small business, they present a massive opportunity for these lenders to gain new customers and broaden market share. Still, Fuloria said he recognizes the large-scale impact late payments have on the market.

“Every time a small business gets hit by late payments, dozens of others in its network can also be hurt,” he said. “Such chain reactions create tremendous inefficiency in the small business economy.”

The solution, the executive added, is “readily available and affordable cash flow” for these small businesses. It’s a vision held by many lenders but one that differs from how other markets have approached the issue. For instance, in the U.K., regulators have attempted several times to curb this issue, introducing the Prompt Payment Code that large corporate buyers can voluntarily join to vow faster payments to their small suppliers. More recently, the U.K. introduced the position of the Small Business Commissioner, dubbed a “late payments tsar” aimed at identifying late payers and attempting to correct the issue.

But a recent survey found that only 2 percent of U.K. SMEs believe that the commissioner will be successful in that effort. Further, critics of regulatory efforts in the U.K. and elsewhere argue that many of these initiatives depend on self-reporting and good faith among corporate buyers, with little incentive for them to actually adhere to their promise of prompt payment.

Fuloria said he is unaware of any similar regulatory efforts under way under President Donald Trump’s administration but did think that “anything that helps small businesses operate effectively is a good thing.”

But, he added, there is another way federal regulation could positively impact the issue of late payments in the U.S.

“We do hope the administration continues to move forward with the Office of the Comptroller of the Currency’s proposal to offer FinTech companies federal charters, so that their efforts can be applied to solve the delayed payment problem,” the CPO stated.

That proposal first surfaced last December and has already received some push-back. It is unclear whether the Trump administration will promote the initiative, though the president has addressed the issue of SME access to working capital in another way: easing Dodd-Frank regulatory burdens on community banks to enable more efficient SME lending.

While broader regulatory efforts have rarely addressed the specific issue of late supplier payments, Fuloria added that collaboration with these traditional lenders is also key to addressing late and delayed problems.

“Banks are definitely aware that small businesses represent a big opportunity, but many of them simply cannot service the smaller capital needs of SMBs profitably,” he explained. “FinTech companies can help banks solve this problem through the application of technology and innovation.”