If I told you that small and medium-sized companies were owed nearly £40 billion as a result of late payments, I think you’d be rightly shocked. But the figure of £39.4 billion comes from the latest research by BACS Payment Schemes, the direct debit company.
Such is the scale of the debt burden on SMEs, up from £30bn last year, 60% told BACS they were experiencing late payments with the average company waiting for £38,186.
One in four small firms said that if the amount owe reached £50,000, it could force them into bankruptcy, the Financial Times reported. And one other telling statistic is that late payments almost doubled in the four years after the recession.
This suggests that tighter regulations on late payment of commercial debt, introduced by the government in March 2013, don’t go far enough.
These are the rules under which companies have a statutory right to claim interest at a rate of 8% over the Bank of England base rate for late payment. Where a public body is the customer, interest runs on outstanding payments after 30 days from:
- Receipt of an invoice
- Receipt of goods or services
- Acceptance of goods or services.
For other businesses, where a payment period is not specified in the contract, interest runs after 30 days from the later of the events listed above. But interest would begin to run after 60 days unless there was proof that any longer period agreed by the parties was not ‘grossly unfair’ to the supplier. The definition of unfairness is wide but includes any ‘gross deviation from good commercial practice’ that is ‘contrary to good faith and fair dealing’. Motherhood and apple pie, then?
The strict 30-day rule for the unpaid bills of the state is important. Public bodies have a responsibility to set a good example on payment of invoices, one that is not always the case. I’ve recently seen a list of who owed what to a third sector provider that had been forced to close, and the number of local government, health and social care bodies was astounding.
On top of interest, there is also the right to claim compensation for the cost of recovering a debt. Fixed sums are payable of £40 for a debt of less than £1,000; £70 for between £1,000 and £10,000; and £100 for £10,000 or more.
As of March 2013 a supplier can claim for any further reasonable costs incurred in recovery of a debt. This could cover, for example, legal advice.
Large businesses are, by the way, owed just £6.7 billion, making the total late payment burden for UK firms a staggering £46.1 billion.
Understandable pressure on the government to do more has resulted in measures in the small business, enterprise and employment bill to force companies to publish information about their payment terms. The aim is to shame big business into paying suppliers promptly.
But has the Department for Innovation, Business and Skills gone far enough?
Well, Philip King of the Institute of Credit Management said ministers had ‘ducked the issue’ by not defining what grossly unfair mean.
‘What is critical is the certainty of payment, more than being caught in arguments over 30 or 60 day terms,’ he said. ‘But there clearly comes a point when the terms of payment should be deemed unfair, for example when they are imposed by the buyer without consultation or negotiation, when they are retrospectively applied to contracts already in place, and/or where they are demanded in circumstances that will clearly be to the detriment of the supplier and exploiting the weakness of his bargaining position. We articulated this view in our official response, but it appears the issue has been ducked.’
One positive step in the legislation is that legal barriers preventing firms accessing invoice finance will be removed. This can unlock the money owed in unpaid invoices, but is clearly not a free service.
SJ Collections is always ready to pursue unpaid invoices that can put survival of a business at risk.