Are you a supplier of services or goods, or perhaps a landlord? If so, the chances are you’re being used as an unofficial bank.
Maybe you think that’s not you. Well, maybe it’s not, if everyone pays you on time as soon as the payments are due, but then you’re in a very small minority.
Statistics show that most SMEs are being paid as and when it suits their debtors, and that their aged debts have increased even more since the dreaded “B” word. Effectively, this means your debtors are using money that belongs to you free of charge, while you’re maybe having to pay overdraft fees because you’re short of those funds. In effect, you’re paying for them to have a loan.
This can have a devastating effect. A survey by the Prompt Payment Directory showed late payments leading directly to 18% of SMEs nationally facing liquidation or bankruptcy and 42% of owners taking out loans.
This situation can place intolerable stress not only on owners, who are sometimes forced to remortgage their home, but also on their staff. Late payments have been found to have sometimes led to payrolls being delayed, while employees of businesses that face going under feel uncertainty about their futures.
Part of the problem is the complexity of the court system for recovering debts and the difficulty of succeeding in the claim. During the summer, I reported on the government’s proposed introduction of Pre-action Protocol, designed to make the process more user friendly, and it came into force on the 1st October, seeking to make it easier to resolve a debt recovery without going through a drawn-out court procedure.
It applies to a business pursuing a claim against an individual, whether a private person or a sole trader, which would make it of particular interest to landlords with non-paying tenants. For SMEs facing late payments from large companies, I reported a few months ago that the government’s considering introducing a Duty to Report.
This would compel large companies to publish the proportion of payments they make outside the agreed period, with the idea that SMEs can make an informed choice who to do business with. However, this proposal was met with some scepticism, and so far it’s still under consideration.
Debt recovery measures may be difficult, but they can succeed, and the alternative is to continue being used by your customers or tenants as a bank. Give me a call if you need help or advice about recovering late payments.