Are late payments crippling your business?

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Are late payments crippling your business?

As many SME’s and OMB’s know only too well, late payments can lead to huge problems sometimes even to the extent of the collapse of the business. Angela Kerry, an Associate in our Corporate and Commercial Department has been looking into the issue, the reasons behind it and what you can do to minimise the problem.

The National Federation of Self Employed & Small Businesses Limited (FSB) found that 37% of small businesses have cash flow problems and estimate that if all payments were made on time 50,000 more businesses could be kept open each year.

The issue was addressed as long ago as 1998 with the Late Payment of Commercial Debts (interest) Act and the subsequent 2002 Late Payment Regulations, but this is still major problem for many businesses.

Some businesses pay late because cash flow for them means they have no choice but to pass it on to their suppliers and subcontractors. However what has become increasingly evident in recent years are the sharp practices used by some businesses or down right bullying. The collapse of Carillion has had a major impact on the West Midlands economy. Unfortunately the tactics used by Carillion whilst it was still going also may have led to smaller firms struggling to survive as they extended their payment terms to 126 days in many instances.

This sort of tactic has been heavily criticised but it is just one of the many ways larger companies flex their muscles. Other examples include requiring suppliers to pay to be on a supplier list without the guarantee of work; applying discounts to a price already discounted because they are a larger business; using existing debts to put pressure on future supply prices; and some more nefarious tactics that could verge on criminality if the actions are deliberate.

The Prompt Payment Code (Code) was introduced in 2008 and has had very little impact. In fact there were reports about how large businesses like supermarket chains, despite signing up to the Code have continued to take advantage of its powerful position by not paying suppliers on time and, in many instances, deliberately late.

The Duty to Report on Payment Practices and Performance Guidance was introduced in 2017. This guide sets out what larger company’s payment practices are. The effectiveness of this Duty to Report, despite the fact non-compliance has criminal sanctions attached, is proving to be somewhat limited to date.

The good news is that government concern and lobbying from various interested groups saw a consultation in 2018 that could have a real impact on this issue for small business.

The Government is looking at a variety of measures. The headline grabbing measures however seem to be; introducing statutory maximum payment provisions and placing specific responsibility on directors to ensure prompt payment.

Mike Cherry, who is the FSB National Chairman, commented that: ‘Late payment is the biggest challenge affecting small businesses and it is good to see the government getting serious about this issue, especially when it comes to large firms paying their supply chains promptly. The voluntary Prompt Payment Code is not working when it allows signatories like Carillion to pay on terms of over 120 days, so we want to see a new tough and transparent compliance regime being proposed’.

It is reassuring to note that the crippling impact of late payments is high on the agenda and should hopefully see some genuine progress this year.

As advisors to SME’s and OMB’s no firm is more aware of this issue than EGL. Whilst we wait for a firmer and more progressive government stance on this issue there are some very real and practical things that a business can do in the meantime:

• Know your customer. A good relationship can help smooth the way over payment issues. A friendly phone call may often be the answer rather terse and short tempered communication;

• Invoicing correctly and promptly. If it’s right and on time there can often be no reason for delay;

• Agree payment terms in advance; and

• Get your T&C’s right and administer them correctly, your employees need to know what to do.

Many customers will dispute demands for payment if the terms and conditions allow them to or the procedure for sending them out is poor and not controlled. In business to business liability can be significantly limited if set out in the contract terms. The seller or buyer can set the terms. If you want your terms to prevail then they need to be drafted effectively and cover this situation.

It is always worth annually renewing Terms and Conditions of trading to make sure they up to date both legally but also in accordance with a businesses practice that may have changed. Indeed if they have never been considered by a lawyer then now is the time.

If you’d like to discuss this article or any issues arising please contact Angela Kerry (click here for contact details) or any member of the Commercial team

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