Knowledge Hub | Articles

23 September 2013

Late payments or non-payments can be highly detrimental to an SME

According to research carried out by the BACS Payment Schemes Ltd, more than one million SME’s face late payments with a total collective debt of almost £36.4billion.

Late payments or non-payments can of course be highly detrimental to an SME and its cashflow – at worst it can put them out of business - therefore any steps to prevent such instances should be taken.

Late payments or non-payments are certainly becoming more frequent amongst SME businesses and appear to have increased over the last five or so years. Although many finance departments are becoming increasingly proactive with outstanding debts and late payments, it still remains a problem within the UK.

The Late Payment of Commercial Debt (Interest) Act which came into force in 1998 (updated by the Late Payment of Commercial Debts Regulations 2013) provides SMEs with the ability to claim compensation from £40 to £100 for any late payments in all business-to-business contracts other than excepted contracts.

Additionally, it gives organisations the ability to demand interest on late payments (currently 8.5%) or a rate which provides a "substantial contractual remedy" which can be of great help, particularly if a business does not have any provisions for interest in their terms and conditions.

Recently, the new Regulations have also given guidance as to the period when interest starts under the Act for certain contracts i.e. a business and a supplier can agree the due date for payment in the contract. Depending on the circumstances, the due date for payment can be up to 60 days or later if the extension is not "grossly unfair" to the supplier. It is therefore important for all SMEs to carefully read terms and conditions provided by other businesses and review their own terms and conditions.

Although this legislation protects SMEs against late payments to an extent, businesses should ensure that they keep an eye on debts and late payments at all times. Of course, a SME's cashflow will be a lot smaller than that of a larger organisation therefore each payment is critical – any missed payment may potentially result in the SME not being able to pay bills themselves which in turn will have a major impact on finances.

Nowadays, SMEs are far more likely to pursue proceedings against debtors or instruct solicitors. For larger debts, many SMEs will consult their lawyer far quicker than in previous years as they understand that failure to do so may be critical for their business. 

To protect themselves, SMEs should tighten any existing credit control procedures and ensure that credit checks are carried out on new clients. Any terms and conditions should include a provision that explains when a bill should be paid and what would happen if the cut-off isn’t met e.g. X% interest would be charged. Furthermore, businesses should ensure they go through debtors lists on a monthly basis and if they find debts are becoming larger then speak with the relevant client.

If SMEs find that any clients are being evasive, they should request legal advice or issue a letter to confirm next steps.  The use of a fixed fee solicitor’s letter, particularly for a commercial collection can often be highly effective especially if it explains to the client the consequences of going to court.

SMEs shouldn’t be afraid to seek assistance when it comes to late or non-payments – failure to do so may just cost the business. Contact Matthew Brandis in the litigation and dispute resolution team for legal assistance.

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