New Ideas to Combat the Late Payment Problem

Many small businesses are still having difficulties caused by late payments for goods and services supplied to other organisations. If this is a problem for you, you may, like many other small business owners, be reluctant to charge the interest and compensation that is legally allowable by the Late Payment of Commercial Debts (Interest) Act 1998. This is understandable because you need to maintain relationships and get more business.

According to Simon McVicker, director of policy and public affairs at the Association of Independent Professionals and the Self Employed (IPSE), late payment to small businesses “jeopardises financial security and damages reputations”. Recognising the severity of the ongoing problem, IPSE has recently launched a report with their proposals for solving it.

The Voluntary Code is Ineffective

Some of it will seem very familiar to your outsourced bookkeepers. With them, you probably recognise the argument that the Prompt Payment Code is not currently effective, and it needs a much stronger commitment from both the public and private sectors. For example, why is it not mandatory to have signed up if you are a supplier to the government or a local authority, or are trying to become one? Those at the end of the line supplying them are so often the ones who have to wait the longest for their remuneration.

Making Late Payment Illegal

Other aspects of the IPSE report are more radical. Some large organisations will only take you on as a supplier on their own terms, which may be 60 or even 90 days as standard, regardless of the terms and conditions normal to your business. IPSE would like to see this outlawed. Current legal sanctions have little power, so it proposes that no payment terms should be longer than 30 days, and that it should be illegal to pay more than 30 days late.

Not only that, but another proposal is to have an automatic fine applied if a payment remains due when it is 60 days late. This could be up to 10% of the total cost of the contract.

IPSE also proposes a Small Business Conciliatory Service to help resolve disputes out of court, providing free advice, or formal mediation services for an economical price. Your outsourced bookkeepers are not the only ones to recognise that small businesses desperately need help when they are up against major enterprises with so much more in financial and human resources.

If you agree with these proposals, you should add your voice to that of IPSE whenever any lobbying opportunities come your way. 

Advice on Chasing Late Payments

The issue of late payments continues to be a problem for many small businesses. Confederation of British Industry (CBI) statistics give £31,000 as the average amount that UK businesses are owed and put the total of outstanding late payments at over £30 billion. According to Matthew Fell, the CBI’s Director for Competitive Markets, “…many firms are being held back from growing and creating jobs because they are owed thousands of pounds.” This, he says, is unacceptable, and he advocates measures to “create a culture of prompt payment in all businesses.”

Suggestions for Promoting the Culture

The CBI has volunteered a number of suggestions in response to the government’s late payment consultation, but warns that introducing heavy-handed regulations could be counter-productive, discouraging dealings with UK firms and giving overseas competition an advantage. They therefore recommend voluntary policies and procedures to encourage the culture of prompt payment.

These include setting a target maximum payment term which could depend on the complexities of contracts. Another recommendation is to make policies more transparent so that supplier payment arrangements can be seen on company websites. The organisation also believes that the term ‘grossly unfair’ in the 2013 Late Payment Regulations is too vague and should be clarified.

Taking Legal Action

Many small businesses are fearful of charging the interest they are legally entitled to on late payments. They tell their bookkeepers that they fear that customers will take their business elsewhere if they do so.

Others whose efforts at chasing payments have got nowhere are considering whether to take their debtors to court. But what are the financial implications of this? What would it cost and what could be recovered from the debtor?

One firm of debt recovery solicitors have made it easy to work it all out. Lovetts have put a claim calculator on their website for anyone to use. Based on specified fixed fees, it gives a breakdown of amounts that can be claimed and a minimum figure of what would be recoverable.

For example, on a debt of £5,000 that is 92 days overdue, the statutory interest would be £107.12, with a compensation amount of £70. When the fixed fee recoverable outgoing of £102 is included, this brings the minimum claim amount to £5279.12.

Outsourced bookkeepers know that other legal costs could also be recovered making the action worth taking, provided there is a cast iron case that the debt is owed and the payment terms have clearly been breached. If you are worried about how to chase late payments, it’s worth discussing it with your bookkeepers as a first step.