In the UK, many small and medium-sized enterprises (SMEs) that established a working relationship with large businesses have suffered the consequences of not getting paid in a timely manner. The scale and threat of late payments is identified as having a draining effect on growth and productivity. Whilst efforts to resolve this issue may focus on addressing those who pay late, there is also a case for targeting SME suppliers who can adopt processes that reduce the likelihood of experiencing late payments or minimise the detrimental effects if they do. These processes also have the potential to deliver wider business benefits, leaving many policymakers asking why SMEs aren't taking these steps already and what could be done to overcome the barriers.
Within the third round of the Business Basics Fund, up to £1 million is available for business and non-business led trials that will look at this question. In total £2m is available, with the UK Department of Business, Energy and Industrial Strategy (BEIS) also interested in proposals for promoting technologies that support other business and administrative functions, such as accountancy, e-commerce, planning, human resources and other “in the cloud” strategies.
In the following post, we provide illustrations of how experiments could be undertaken to test different ways to encourage SMEs to adopt technology and administrative processes that would limit their exposure to late payments. We hope it provides some ideas for those who are considering developing a proposal for the Business Basics Fund. For more inspiration look out for Eszter’s blog on trials looking at the topics of technology and management practice adoption, which will be published soon.
Challenge 1: Before entering contracts, many SMEs do not research payment histories of potential customers
59% of respondents to BEIS’s call for evidence into the issue of late payments indicated that they do not research the payment performance of a business before they enter into an agreement with them. Amongst those that do check payment histories, the most popular approach is to conduct a credit check. By making these checks, SMEs could avoid late payments (eg monitor these invoices more closely) or at least plan based on more realistic expectations.
For this illustration, we have assumed that there is a significant group of SMEs who are using platforms where these checks are available but currently do not make use of this functionality. We want to explore whether a lack of information on the benefits is a key barrier and use behavioural insights to see how to best engage them.
Research Questions: Does providing firms with information on the benefits of undertaking credit checks increase usage compared to a simple reminder of their availability? Can behavioural insights be used to increase the impact?
Trial Setting: To conduct the experiment we have partnered with a company with a platform that processes invoices for SMEs. The system enables users to conduct credit checks and we are able to identify those using the platform who do not make use of this functionality.
Trial Design: The trial is designed to have…
- A control group: who receives a reminder that the functionality to perform credit checks is available.
Treatment groups: Everyone assigned to the treatment group receives a reminder that also discusses the benefits of conducting the credit checks. The content of the reminder is the same for them all but we further divide the treatment group, where particular elements of the message are emphasised.
Social norm - A majority of SMEs examine potential clients payment histories with credit checks the most popular.
Risks - Late payments can have a negative effect on your business and you can take this step now to help avoid it.
Simple - Conducting these checks are straightforward.
Outcome Measures: Our primary measure is whether they conduct the credit checks.
Several experiments and tweaks could be tested at this stage, based on providing SMEs with greater transparency and access to clear and useful information to make better contracting decisions, for example, the use of credit scores to ease the information provision or the deployment of different messages to encourage SMEs to engage actively and demand clear access to information.
However, we also plan to measure whether usage leads to the expected benefits such as increased payment times. We also worry that impacts will not necessarily be all positive. For example, might loss aversion lead an SME supplier to turn down opportunities that would still have been beneficial despite carrying higher risk?
Challenge 2 - Many SMEs are not using proven technology to manage their payment processes
Technology can make payment practices more efficient and businesses more productive. 62% of respondents to BEIS’s call for evidence say they use technology to manage the payment process. This technology provides many beneficial functions such as automatic invoicing, reminders and payment processing.
However, a large number of SMEs are not using them. Within the call for evidence, a range of explanations were provided. From the cost of the technology through to a lack of awareness and knowledge of what technology is appropriate.
As in our previous example, these platforms can also provide access to the payment histories of potential customers. But perhaps many SMEs do not feel they would be able to extract the value from this information - 59% of respondents also said they feel unable to negotiate and/or challenge payment terms offered to them.
For this trial illustration, we have decided to look at the barriers that prevent SMEs using these technologies to enhance payment practices. In particular, whether it is sufficient to provide training to raise the awareness of the benefits to the SMEs or whether there is a need to provide more intensive support on how the individual SME can realise them.
Research Questions: Amongst SMEs who do not use payment processing technology, does offering SMEs a workshop on the benefits of using the technology increase adoption and generate wider business benefits than information alone? Is adoption and benefits realisation greater if the information on benefits is provided alongside training on how to negotiate better payment terms?
Trial Design: The trial is designed with three arms:
Control SMEs - Provided with basic information on payment processing technology.
Treatment A - Provided with the basic information + a workshop outlining how they can be used.
Treatment B - Provided with the basic information + a workshop outlining how they can be used + individual training on how to negotiate better payment terms.
Outcomes: Do they adopt the payment processing technology. Contract payments times negotiated with customers. Realised payment times.
Challenge 3 - When experiencing late payments, SMEs can feel unable to resolve the situation
A large number of respondents felt that an imbalance of power between businesses is the key reason for long payment terms. Imbalance of power is also the major factor preventing businesses from chasing payments when they are late. 76% of businesses contact the business who is late in paying, but that doesn’t appear to reduce the number of late payments.
SMEs need new strategies when contacting suppliers that would lead to a successful reduction of late payments without damaging the business relationship. Helping businesses to address the imbalance of power by empowering them is crucial for the success of reminder strategies.
Reminders are a useful tool to encourage positive behaviour, but it could be enhanced by applying different messages based on behavioural insights. Training SMEs to apply behavioural messages could provide them with the tools to deal with late payments in an effective way, leading to a self-reported reduction in the estimated imbalance of power, and reducing the number of late payments due to successful change of behaviour in the suppliers.
Research Question: Does training SMEs in using behavioural insights when sending reminders lead to a reduction of estimated power imbalance and successfully change the behaviour of suppliers towards a reduction of late payments?
Trial Setting: To run the experiment we are working with a partner that has access to a group of SMEs who are dealing with late payments.
Trial Design: The intervention trains SMEs to apply behavioural insights to improve reminders to big suppliers. The control group would be encouraged to send regular reminders to suppliers, while the treatment group would receive lessons on the different messages that they may send based on behavioural insights (use of social norms, social pressure, authority bias etc).
Outcomes: Increase in self-reported confidence when dealing with big suppliers, improvement of self-reported estimation of power imbalance. Ultimately, reduction of delayed payments due to the success of behavioural messages in reminders.
Supply Chains - Harnessing and measuring impacts
Prompt payment is an essential prerequisite for healthy and resilient supply chains. This is critical for SMEs, where cash flow is often managed on tight margins. When small firms supplying larger businesses face late payments, the entire supply chain is affected. A lack of resilience planning by small firms means that their supply chains remain vulnerable to potentially substantial disruption.
Experiments looking at the supply chain could also provide valuable evidence to empower small firms and mitigate some of the risks. For example, testing different strategies to promote the Prompt Payment Code across the supply chain, or offering training for businesses engaged in a similar chain or from the same sector.
If an SME adopts a new payment processing technology, then those higher-up in their supply chain will likely be exposed too - eg. receiving and paying invoices through the system. Experiments could test the extent to which there are spillover benefits for adoption, with those higher-up in the supply chain also becoming more likely to adopt.
Those development experiments could also consider how they harness the power of supply chains. Perhaps offering training for supply chains together against businesses individually, or looking at the benefits of involving the ‘primes’ - as utilised in past initiatives.
Those are some examples of potential experiments that would help SMEs limit their exposure to late payments, but several training programmes, support schemes and messages could be tested. With this round of the fund, BEIS is giving priority to this concerning problem among the SME population. But there’s not a single solution to this issue.
We need evidence to clarify which strategies could be more successful to support SMEs; several treatments and interventions could be tested that could be equally effective.