Tax & admin · 8 December 2016

Small business payment disputes are costing the UK billions

Half a million small business owners left their latest payment dispute unresolved due to the heavy costs involved.
Half a million small business owners left their latest payment dispute unresolved due to the heavy costs involved.

Payment disputes are costing small firms in England and Wales at least £11.6bn a year, according to new research published by the Federation of Small Businesses (FSB).

In its latest report ‘Tied up: Unravelling the dispute resolution process for small firms’, the FSB revealed the scale of small business payment disputes in the UK, and its impact on the economy.

Late or non-payment of invoices is shown to be by far the biggest cause for dispute among business owners. Almost three quarters of the legal struggles of small firms stem from late or non-payment issues.

The results of a survey, conducted among nearly 1,000 FSB member companies throughout Britain, revealed that the majority of small business owners experience some form of payment disputes in recent years. Between 2010 and 2015, 70 per cent dealt with at least one dispute.

The report also revealed the costs to firms of chasing debts and resolving payment disputes. Even though the average amount involved in small business payment disputes is £18,000, spending time and money trying to resolve the problem can cost owners as much as £17,000.

Commenting on the research, FSB national chairman Mike Cherry said that legal processes for resolving payment disputes were too costly and complicated for small businesses. “Disputes are inevitable in business, but many small firms don’t have the time or resources to deal with them effectively,” he said.

“We want to see a beefed up system to bring about fewer disputes and faster resolutions for small firms.”

The report found that small business owners are much less likely to take formal legal action to settle disputes than larger counterparts. As many as 43 per cent choose to settle problems informally or semi-formally, either on their own or by using an advisor, like an accountant or solicitor.

Just 19 per cent of small business owners took their most recent dispute to court, whereas only 8 per cent brought in an external arbitrator or mediator to solve the problem. As many as half a million small UK business decision makers chose to leave their latest dispute unresolved, according to the study.

Cherry reiterated the need for a small business commissioner to be appointed as soon as possible to help address the systemic late payment culture that’s damaging business and hindering the economy.

“[The small business commissioner] should become a hub for prevention and early intervention, dispute advice, and for helping small businesses identify and use alternative dispute resolution,” added Cherry.

The report recommended that the fees system in civil courts be overhauled, and a new “commercial track” introduced at the lowest level of the courts system, to make it quicker, cheaper and fairer for small business owners to resolve dispute.

A further study, conducted by cloud accounting software firm FreeAgent, has uncovered the best and worst areas of the UK for late payments to micro business owners and freelancers.

The latest figures of the UK towns and cities worst and least affected by late and non-payments are shown in the table below.

Worst affected areas for late payment

City Percentage of invoices paid on time
Sheffield 24 per cent
Twickenham 27 per cent
Slough 29 per cent
Leeds 39 per cent
Stevenage 39 per cent

Least affected areas for late payment

City Percentage of invoices paid on time
Manchester 75 per cent
Aberdeen 61 per cent
York 61 per cent
Leicester 58 per cent
Norwich 58 per cent

 

Cherry concluded: “Our research shows poor payment practice as the root cause of disputes. A huge burden would be lifted from small businesses by rebooting the system around prevention and resolution.”

Margot James reaffirms government commitments to combat late payments

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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