More and more we hear nowadays that SMEs are stymied in their growth plans by late payment. In serious cases late payment can result in job losses and even liquidation of the company. Obviously, in some fragile economic times, the last thing small businesses need is to be waiting months on end for cash for services rendered.
But help could be at hand. Mark Prisk the Business and Enterprise Minister, is throwing his weight behind a drive to make sure SMEs get paid on time.
Prisk has announced a new working group of business representatives would examine issues behind late payment, while the Association of Chartered Certified Accountants (ACCA) published a new guide on prompt payment.
Advice and guidance for small businesses to help them make sure they are paid on time and can seek redress if they are not is part of the Finance Fitness campaign, which sees government and businesses working together to help SMEs.
The Government is encouraging SMEs to:
- Proactively agree payment terms before delivering orders.
- Sign-up to the Government’s Prompt Payment Code, run by the Institute for Credit Management (ICM) and representing an estimated 60 per cent of supply chain value in theUK.
- Raise complaints over late payment from Code signatories and use legislation already in place to help companies pursue late payers.
- Use electronic invoicing where possible, automating process and adding instant transfer of the invoice and instant verification from the customer that the invoice has been received.
Get Paid!, a new guide for small businesses which contains tips and advice from both suppliers and customers, has been published by the ACCA. It contains valuable lessons from small businesses such as advice on invoicing and developing a well-defined credit policy.
We at Coalesco welcome these moves, and would encourage every business to sign up to the Prompt Payment Code. Naming and shaming persistent late payers is vital if our SME community is to thrive, and will ensure good corporate governance from those larger companies upon whom so much rests. They have been warned!
Late payment is a persistent problem forUK businesses and can result in serious cash flow problems, falling profits and ultimately affect the liquidity of a business.
However, nowadays, businesses have the ability to charge interest on overdue debts. Many businesses, will be unaware of a piece of legislation which was introduced back in 1998 called The Late Payment of Commercial Debts (Interest) Act 1998 (“LPCDI”) and it was introduced because many businesses, especially smaller companies, had experienced problems when their customers delayed payment for long periods. However, under the LPCDI, all businesses, regardless of their size, can now claim interest on overdue debts. The interest on late payment is the Bank base rate, plus 8% per year. So at present this is equivalent to 8.50% per year.
Depending on the age of the debt and the movement in base rate, the rate may vary. A claim for “reasonable” compensation can also be obtained from the debtor for collection costs (in addition to Court fees if you sue and win).You are entitled (but not obliged) to claim compensation from the debtor for debt recovery costs of between £40 and £100 depending on the size of the debt. Many businesses are reluctant to use the LPCDI and demand interest on overdue invoices for fear of upsetting their customers and jeopardising future business.