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Long payment terms in retail are becoming unsustainable

The retail industry has often attracted criticism for paying suppliers slowly. Recently, Holland & Barrett became the first company to be publicly named by the UK’s Small Business Commissioner for its treatment of one particular supplier when it came to payments.

The Commissioner’s Payment Practices Report makes clear that this is not an isolated incident. Over 30% of invoices are not paid within agreed terms according to the report.

This is a serious issue. Slow payments have a devastating impact on suppliers, particularly SMEs because they substantially restrict cash flow. It is not uncommon for smaller suppliers to have to pull out of large contracts because they do not have the available working capital. In the worst cases, slow payments can destroy businesses. According to reports, slow payments cause almost a quarter of UK insolvencies and they directly force 50,000 SMEs out of business in the UK every year.

As a result, it is not surprising that the Government is looking to increase scrutiny around the payments issue. In June, it announced the boards of large firms will have to take direct responsibility for payment times, while the Small Business Commissioner is likely to be given additional enforcement powers against businesses held to be paying too slowly.

It is in our interests too

Retailers need to change their payment culture, not only to meet demands from the Government and the public, but also because it is in their interests as well.

As shoppers become more discerning, seeking more choice and unique products, retailers are increasingly keen to work with small, innovative suppliers. By locking these suppliers out as a result of lengthy payment terms, retailers are severely restricting their ability to bring a broader range of products to their customers.

Long payment terms can also have quite a destabilising impact on supply chains. In today’s world of lean supply chains, and with retailers looking to become hyper-responsive to client demand, insolvencies and cancelled orders can be a real problem. When time is money, having to find new suppliers at short notice can create extremely expensive delays.

Finally, those suppliers which are able to deliver on contracts often need to rely on credit to support their cash flow while they wait for payment. The cost of credit for small suppliers is substantially higher than most retailers’ own, and therefore this adds a meaningful, although hidden, cost to purchases for the retailer.

Speeding up payments would directly benefit buyers in reduced costs and a more stable, dependable supply chain.

Challenges of speeding up payments

However, if it were just as simple as choosing to speed up our payments, it would have been done already. The fact is it is not easy for retailers to change how they pay their thousands of suppliers. B2B payments are riddled with control systems, paperwork and lengthy processes.

Data analysed by Previse shows that it is not uncommon for significant retailers to process over 500,000 invoices per annum. That is the equivalent of one invoice every minute of every day. This is a huge resource drain and asking a firm to invest yet more to increase its capacity is, for many, simply not realistic.

That is why I believe we need to take a radically different approach to payments in the retail industry.

Using data to improve efficiency is not a new concept, but it is yet to make a big impact in the sphere of invoice payments. There are technology-based solutions already in the market which have strong support from SMEs and the Small Business Commissioner. These solutions use artificial intelligence to analyse data, enabling suppliers to be paid instantly. They are capable of checking millions of invoices in less time than it takes a us to make a cup of coffee.

By embracing such technology, retailers can ensure that none of their suppliers are paid slowly – and retailers can do this in a fully sustainable and economically advantageous way.