The Problem of Late Payment, Long Payment Terms and What Your Business Can do about it

As a small or medium business, you have probably come up against the significant issue of being paid late by your customers. You have probably also been forced to accept very long payment terms by larger businesses because of the imbalance of power in contract negotiations.

Long payment terms and late payments have a serious knock-on effect on your cash flow. You become unable to invest in new equipment and staff, you may have to increase overdrafts or take on new bank loans and, for some businesses, it may mean salary cuts, redundancies and insolvency. In short, the future growth of your business is directly affected by long payment terms and late payments.

There is a culture of late payment and long payment terms in the United Kingdom. Why this has come about is unclear but it is a stark difference to our European neighbours, where they see prompt payment as a badge of honour and good business. For this reason, the Government recently opened a consultation into this area to see if changes to legislation needed to be enacted. Unfortunately, the results were mixed and it is unlikely we will see any changes to current payments legislation. However, there are some things we can learn from that consultation and some things that businesses need to be reminded of in order to protect their business interests. The overwhelming majority of SMEs simply chase the debtor, repeatedly asking for payment, but there is much more that you can do.

We set out below some key steps you can take if your business is currently suffering from late payments and long payment terms:

1. Current UK Legislation

Current legislation already gives maximum 30-day payment terms for transactions with public bodies. It also gives maximum 60-day payment terms for all other business-to-business contracts unless they agree longer terms between themselves and those new terms are not “grossly unfair” to the supplier. Unfortunately, what “grossly unfair” actually means is unclear and has been the subject of much debate. Also, from 1 September 2019, any business that bids for a Government contract above £5 million will be expected to pay 95% of their invoices within 60 days across their whole business.

2. Research and Investigate Your Customer

Before you start supplying the customer you might want to consider doing your research on them and taking a view on the risk of them paying you late. If they are an essential customer for you, then this may not make a difference to your decision, but it always pays to do your due diligence:

a. Running a credit check against them might raise any red flags about their solvency before you even start supplying them.
b. Check the Payment Practice Reports at https://www.gov.uk/check-when-businesses-pay-invoices. This is a register of large businesses and tells you their record of paying invoices on time. This register has increased Board level responsibility for late payment and has started to improve the situation.
c. Check the business accounts at Companies House.
d. Talk to others in your industry for any awareness or knowledge on the particular business and their payment practices.

3. Contact the Small Business Commissioner and Trade Sector Bodies

It is bewildering how few businesses know that the Small Business Commissioner can help. Since the role was introduced in 2017, the Commissioner has recovered more than £3.5 million in late payments for SMEs. You are able to contact the Commissioner, report the late payer and the Commissioner may, in certain circumstances, help you to recover the debt that you are owed. Find out more at https://www.smallbusinesscommissioner.gov.uk/deal-with-an-unpaid-invoice/get-advice/. You should also contact organisations in your trade sector which can help to resolve your issues, especially if you are in the Construction industry, or if you supply to a supermarket or to a Government body (the Small Business Commissioner cannot help you in those areas).

4. Calculate Statutory Interest on the Debt and Re-Invoice the Late Payer

The majority of SMEs are hesitant to enforce their legal rights with debtors for fear of losing business and damaging relationships. However, does not enforcing your legal rights contribute to the underlying late payment culture? That is a question for another time. However, you don’t need to sue the debtor to enforce your rights – interest on late payments is a statutory right and you should make this known at the earliest opportunity. Currently, the interest rate is set at 8% above the Bank of England base rate, which would make the current late payment interest 8.1% per annum. Calculate the interest at that rate, then re-invoice the late payer with the additional amount. This might make them aware that you are serious about enforcing your rights.

5. Invoice Financing and Supply Chain Finance

It might not be right for some businesses, so you should consult expert advice, but Invoice Financing and Supply Chain Finance can help with short term liquidity and solidifying the supply chain. Invoice Financing involves assigning the amount of money owed to you to a finance company, who then advances you 80% (usually) of the debt. From 31 December 2018, contract terms which forbid the assignment of amounts owed to businesses can no longer be enforced, which means that invoice financing could be available to you. Supply Chain Finance is more complex and is usually arranged when you have a very large and reputable customer; it enables you to obtain early payment or financing from a bank against the invoices you have issued to the large customer.

6. Legal Action

You can, of course, take legal action which would likely involve sending a letter before claim followed by issuing legal proceedings if the debtor does not pay. Legal action can be costly and risky but sometimes it may be your only remaining course of action. It does not need to be stressful, however, and we can help you to navigate through the process.