THE serious problems posed by persistent late payments have been plaguing otherwise healthy businesses for years. The figures speak for themselves – during the recession around 4,000 companies failed because outstanding bills weren’t paid on time, with much of this loss being avoidable.
It’s an issue which has come back into focus in recent weeks and affects small and medium enterprises (SMEs) more than large companies. The latest figures from Bacs Payment Schemes show that late payments now total £46.1 billion with 85 per cent of that burden shouldered by small and medium-sized companies. In fact, 60 per cent of SMEs say they are now experiencing late payments on a regular basis.
The stark reality is that the practice of late payment fundamentally slows economic growth. For many firms, it will also damage their own financial interests by preventing growth in their own markets. It’s very much a self-defeating act.
The problem has more to do with a company’s, or even an industry’s, culture rather than its size. In certain instances, the employment of “sharp practices” may be encouraged – such as invoices being queried on the 59th day – one day before the contractual term for payment is due.
There are, of course, legal steps that can be taken to prompt customers into action. Late payment legislation offers interest at 8 per cent above the base rate, in addition to compensation and certain costs incurred. Alternatively, issuing winding-up petitions or raising a court action are more drastic statements of intent.
However, for those who are aware of the available options, fear of ruining their business relationships can be the biggest barrier. For SMEs beholden to a few customers, this can be a particular issue and may mean they even feel reluctant to charge any interest on late payments. Suppliers can often feel coerced into accepting the terms on which the customer wants to operate.
This could be redressed by new UK legislation which is currently at committee stage in the House of Lords. There are proposals in the Small Business, Enterprise, and Employment Bill (SBEE) to introduce regulations which would require larger firms and listed companies to publish certain information about their payment practices.
Under its terms as currently drafted, companies will have to provide their standard payment terms and details on any codes of practice to which they are signed up. Businesses will also be required to place their payment practices report prominently on their website for three financial years.
Although this is unlikely to yield wholesale changes in the short term, over the long term it could bring about a cultural shift in business practices which will ensure SMEs receive payments on time. Greater transparency will give companies the information they need before entering contracts, while public reporting could pressure some businesses into maintaining the standards of their competitors.
Failure to comply with these regulations could have ramifications for every director of any business in default.
With 60 per cent of the UK’s private sector jobs relying on SMEs, they are often referred to as the lifeblood of our economy. If growth is being held back by late payments then the culture has to change. The proposed solutions are better late than never.
• Jamie McIntosh is a corporate recovery partner at HBJ Gateley.
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