Member Article

Late payment: the biggest headache for SMEs

As if businesses haven’t already had enough problems coping with the recession, smaller companies which do manage to land contracts often have significant difficulty when it comes to actually getting paid for the work done. Late payment (or even worse – non payment) can be a significant, if not catastrophic issue. With over £30 billion owed to small businesses in outstanding debts, the government is considering introducing a late payment levy which would penalise companies that fail to pay on time. Ministers are also analysing the best ways of encouraging firms to pay within 30 days of receiving invoices, in light of the fact that many contracts with larger businesses allow six months to elapse before payment becomes necessary.

A recent report by The Bank of England noted that larger customers are seeking longer payment terms from small suppliers and where early payment is offered an overall discount is being sought. Clearly this places great pressure on the working capital that small businesses need to run their business. There needs to be robust procedures in place to communicate with clients who are late in making payment.

Naming and shaming is not working:

A previous government initiative which threatened to “name and shame” FTSE 350 companies which refused to sign up to a prompt payment code – a voluntary commitment to pay suppliers within agreed terms – failed to have the desired effect, with less than half of them signing up. At the time, the Minister for Business and Enterprise Michael Fallon noted “Late payment is a real issue for businesses across the country. It is not fair and poor cash flow can prevent small firms growing and even push them into insolvency.”

Difficult to legislate:

Although legislation exists which enables companies to claim interest in respect of late payments – in the form of the Late Payment of Commercial Debts (Interest) Act 1998 – smaller companies are reluctant to get legalistic for fear of upsetting a larger client and losing future business, which would have a more detrimental effect on their business than just waiting longer to receive payment. Furthermore, introducing stricter laws to curb late payment could attract criticism for creating unnecessary red tape, which may be a reason for the lack of political will to enforce a change until now.

Vince Cable trying to help SMEs:

According to a spokesman at the Department for Business, Innovation & Skills, the Business Secretary Vince Cable “is concerned about companies struggling because others aren’t settling bills on time. This has an unfair effect on them growing their businesses. He’s looking at what can be done by Government to help.” The possible late payment levy – which would operate in a similar way to an existing Swedish scheme – would form part of a package of measures designed to support small businesses and promote “responsible capitalism”.

Late payment reminder letters:

Good business practice can often achieve the desired outcome more efficiently and effectively than a multitude of legislation or politicians with even the best intentions. For example, a professionally worded late payment reminder letter can prompt a customer or business to take swift action to pay your invoice. Rocket Lawyer (www.rocketlawyer.co.uk) offers a first payment reminder letter and a follow-up second payment reminder letter for any stragglers. If this fails to have any effect, use a letter before action before commencing legal proceedings for collection and enforcement of the debt. One way to encourage timely and full payment in the first instance is to create a debt promissory note. This can be used in advance when you want to create a legally enforceable contract for repayment of a debt. These professional documents can be created for free on the website – just take advantage of the one-week free trial.

This was posted in Bdaily's Members' News section by Mark Edwards .