Why contractors are paid late and what can be done about it
By Richard Prime, co-CEO and co-founder of Sonovate
This op-ed was originally published in Business Express on September 14, 2022
Businesses don’t pay their contractors on time. It’s a fact. It’s not something they set out to do, but as chaotic cash-flow ripples across the economy, it’s contractors who shoulder the burden.
At Sonovate, we know first-hand from the agencies that we work with that paying contractors on time is a problem. Our Future World of Work research last year showed that flexible, hybrid and outsourced labour is dominating the labour market, yet contractors still weren’t benefiting from prompt payment.
What we didn’t know, however, was the scale of the problem. To explore this, we surveyed 500 senior decision makers in small-medium sized businesses (SMEs)* to find out why businesses are failing to pay contractors on time, and how they can improve their performance with the help of their recruiters and innovative tech solutions
Our findings were truly shocking. Over a third (37%) of medium-sized businesses who use contractors admit they take more than 90 days to pay contractors. The cause? Almost two-thirds (62%) of SMEs who use contractors say late payments from clients and customers cause cash-flow issues. Half (50%) say the knock-on effect is late payment to contract workers. When you consider that most permanent staff in the UK are paid a monthly salary, 90 days is absurdly long, particularly considering the current cost of living crisis.
These delays are startling. Default mandatory payment terms vary across major economies, but 30 days is the norm. The European Parliament recently adopted a resolution setting out late payments in commercial transactions, stating businesses must pay invoices within 60 days unless expressly agreed. Public authorities must pay for services within 30 days, with 60 days in very exceptional circumstances. In Australia, accounting software provider Xero estimates 75% of invoices request payment within two weeks. Late payment is therefore particularly unacceptable amidst this trend for shortening payment times.
Why are businesses struggling to pay on time? Our survey shows around a third who use contractors struggle to pay on time due to cash-flow issues. More than a quarter blame payroll issues, such as incorrect processing, but as we’ve seen, the majority blamed the knock-on effect from late payments from suppliers and customers.
The results are damaging. Contractors are vital to businesses, yet many risk losing these workers if they cannot pay on time. Four in ten (39%) say their payment woes could mean they lose quality talent from contractors. And a quarter (24%) admit they have already lost workers due to promptness of payment.
So what can be done? With the global gig economy expected to grow to $455 billion by 2023*, there is a clear need to improve access to finance, and consequently cashflow, to help businesses pay and retain staff. Businesses, however, report problems accessing bank finance. This suggests a gap for alternative finance to fill. The problem is one of awareness. More than a third of businesses say alternative lenders make it easier for businesses like theirs to access funding. But a larger proportion, 39%, say they simply don’t know where to look for alternative funding. By using embedded finance, organisations that offer services to these businesses – such as recruitment agencies – can help plug this gap and benefit their clients.
Contractors are critical to companies. It is vital they are treated well. With the right approach payment can be made on time, every time. At Sonovate we are committed to understanding the contractor economy and enabling it to thrive. Our role is to provide flexible funding to recruiters, consultancies and labour agencies to allow them to pay contractors within seven days of timesheets being completed. Both the end client and contractor are liberated from the cash-flow crunch.
Work patterns are changing. Hybrid, flexible, and outsourced labour are dominating the labour market. Recruiters and labour agencies are integral to this change, but the businesses they work with are not being served by banks who have either the vision or the technology to match these needs. With the right partner, contractors can be paid on time, no matter how clients behave. Prompt payment can be the bedrock of a reputation everyone will want to talk about for the right reasons.
The survey was conducted by Opinium, on behalf of Sonovate and surveyed 500 senior decision makers at small and medium sized enterprises (between 1-249 employees). Of which, 264 currently or have used freelance/contract workers in the past.