01 Jun Late Payments and How To Ease Cash Flow Issues
More than half Britain’s small companies are owed money from late payments, with estimates totalling as much as £255 billion outstanding, so said a survey commissioned by Zurich Insurance in 2015.
Businesses clearly see late payments as one of the greatest threats facing business survival, with two thirds (67 per cent) of those surveyed agreeing that late payments are leading to some SMEs being forced to close down.
Jason Eatock, head of SME at Zurich says that £255 billion owed in late payments to British SMEs is an ‘enormous sum’, and that it is no surprise that many have experienced cash flow problems as a result.
‘We have been warned about a ‘cocktail of threats’ to the economy, and small businesses will need all the capital at their disposal to weather this potential storm.”
What can be done about late payments?
Late payment is a frequent bugbear of small companies, and the problem could be worsening.
Suzanne Smith, senior associate in the litigation & dispute resolution arm of BP Collins, feels that late payments or non-payments are becoming more frequent among SMEs and appear to have increased over the last five or so years.
‘Although many finance departments are becoming increasingly proactive with outstanding debts and late payments, it still remains a large problem within the UK,’ she says.
Hanging on to cash that they should be paying to smaller firms gives these companies access to cheap finance, and as a result, many of the large companies are using their suppliers to bankroll their businesses.
Charlie Mullins, CEO of Pimlico Plumbers, says that making sure you get paid for the jobs you do sounds simple, but actually, it’s the number one reason why many viable businesses go broke.
Don’t be afraid to ask for payment
‘Don’t be afraid to ask for payment, and don’t start new work or supply more goods to someone who owes you in the hope that you will be paid,’ Mullins says.
The Late Payment of Commercial Debts (Interest) Act, which came into force in 1998 (amended by the Late Payment of Commercial Debts Regulations 2013) provides SMEs with the ability to claim fixed compensation from £40 to £100 for any qualifying late payments in business-to-business contracts other than excluded contracts.
Additionally, it gives organisations the ability to demand interest on late payments (currently 8.5 per cent). The start date of when the interest on the late payment runs from depends on various factors including whether it has already been agreed by the businesses.
Recently, for contracts made on or after 16 March 2013, the new Regulations have also given organisations the ability to claim the reasonable costs of recovering the debt in the case that the reasonable recovery costs are not met by the fixed compensation sum. It is now far more likely that SMEs will pursue proceedings against debtors or instruct solicitors. For larger debts, many SMEs will consult their solicitors far quicker than in previous years as they understand that failure to do so may be critical for their business.
Although this legislation protects SMEs against late payments to an extent, businesses should ensure that they keep an eye on debts and late payments at all times. For example, in order to better protect themselves SME’s should:
SMEs should tighten any existing credit control procedures and ensure that credit checks are carried out on new clients.
Any terms and conditions should include a provision that explains when a bill should be paid and what would happen if the cut-off isn’t met including an interest provision.
Speak to your clients regularly about payment plans
Businesses should ensure they go through debtors lists on a monthly basis and if they find debts are becoming larger then speak with the relevant client.
If SMEs find that any clients are being evasive, they should request legal advice or issue a letter to confirm next steps. The use of a fixed fee letter from a regulated firm of solicitors, particularly for a commercial collection can often be highly effective especially if it explains to the client the consequences of going to court.
The late payment problem will always be an issue for small businesses but an understanding of your legal rights and the use of simple strategies listed above should help in your fight for what is yours.