Late payment and the small firm: an examination of case studies

The issue of the late payment of commercial debt has been cited as a major problem facing small business and has precipitated much political debate. In the UK this has led to establishing the Better Payment Practice Group, and legislation to enforce a statutory right to interest on late payments. A number of surveys have highlighted the extent of the late payment problem and suggested possible causes for it but there has been relatively little work, theoretical and/or empirical on understanding the payment behaviours of firms. This paper builds on previously reported survey results and econometric analysis, to develop 13 small firm case studies where the management and financing of trade credit is analysed in detail. The case studies draw on a combination of qualitative and quantitative data from interview transcripts, questionnaire responses and secondary data. Credit management is examined from the firm’s perspective as both a supplier and a customer. Valuable information is provided on the extent of late payment and small firms’ perception and management of the problem. The analysis revealed that while late payment concerned all the firms interviewed some of them managed it better than others. At the extremes there were two distinct types of firms. Those who found late payment to be the greatest problem were “juggling” various forms of short‐term finance to fund their working capital. Their credit management procedures were ad hoc and unsystematic but there was no evidence that they were at the mercy of dominant customers. Firms who managed late payment had systematic credit management procedures in place, a good knowledge of when to expect payment from each of their customers and appeared to be more in control of the process. Longer‐term sources of finance provided them with the stability to plan ahead and there was sufficient flexibility in their financial structure to cope with minor hiccups.