Tax & admin · 13 March 2019

Too little, too late? Spring Statement crack down on late payments in review

Photo: Raul Mee

In today’s Spring Statement, chancellor Philip Hammond declared “The end of late payments could finally be in sight.” But what is the government actually doing about it?

50,000 small businesses fold every year due to late payments. The trickle down effect on the UK economy is much farther reaching as SMEs famously employ 60% of the UK private sector workforce.

Following a campaigning push from the Federation of Small Businesses and other groups, Hammond confirmed today that the government would introduce tougher accountability measures to end the late payment crisis.

According to the chancellor, company audit committees, chaired by a non-executive director, would review payment practices and report on them in their annual accounts.

Promises, promises: Is this yet another empty pledge?

Inna Kaushan,  founder of invoicing platform Solna, believes this is a good first step but isn’t enough to stop large companies using smaller ones as unofficial lines of credit. Not to mention the fact that this pledge echoes what small business ministers have been saying since 2012, if not earlier.

“(P)romises have been made to small businesses before – and these have either never materialised or have been broken. So, we will have to wait and see if this new action really does help to crack down on late payments,” she says.

According to the FSB, 58% of their members are owed up to £10,000 in late payments from their clients. 15% are owed between £10,000 and £20,000, and 27% are owed over £20,000 from their late paying clients.

“We’d like to see the worst offenders named, shamed and fined. Having to release details of their payment practices is definitely a step in the right direction, as we will now be able to see who is consistently using freelancers and SMEs as unofficial lines of credit,” Kaushan adds.

Addressing hypocrisy: One rule for big business, another for small?

Big companies are often the first to threaten legal action if payment is late but are the last to pay their suppliers, says Kaushan. This hypocrisy is well known in the business world, yet very little has been done to enforce stricter payment terms.

“Everyone deserves to be paid on time for the work they do. For too long, many big corporates have been riding rough-shod over freelancers and SMEs, we need to ensure these companies play fair. Essentially, what we are asking for is a level playing field.”

Carl D’Ammassa, business finance group managing director at Aldermore Bank sees this everyday. Aldermore’s own study conducted by Opinium Research in November 2018 reveals that over a quarter of UK’s SMEs struggle monthly because of delayed payment from big business customers.

“For too long, large organisations looked at their supplier terms as a means of financially boosting their performance – at the detriment of smaller companies. We are calling for this unfair practice to end,” he says. “We believe the government should incentivise businesses to ensure that paying suppliers late is financially not in their interest, as it is today.”

Mark Collings, chief commercial officer of debt finance platform, CODE Investing, notes the farcical nature of payment terms in UK’s business landscape. “Late payments to smaller businesses from bigger players do not just inhibit their growth but can send them to the wall,” he says.

“It’s a farce that big businesses have been getting away with systematically paying their suppliers late for so long. More than anything, it’s the supply chain of countless UK businesses that needs a thorough spring clean.”

 

The wider impact on SMEs

Businesses today operate at an international level, working with a network of suppliers across the globe. Any payment delays caused as a result of currency fluctuations, varied banking hours and time zones have huge implications for companies of all sizes. According to Centtrip CEO Brian Jamieson, resolving the issue of late payments could contribute £2.5 billion to the UK economy, so the sooner we can do it, the better.

“We have already seen a number of fintech firms join the wider efforts of larger financial institutions to develop and promote faster and even instant payment options across time zones. That said, our research shows that one in five businesses don’t think decision makers place enough value on the technology available to them,” he says.

“Regular audits of corporate payment practices is a good initial step forward, but there should be an even greater commitment to innovation to ensure businesses big and small are equipped with the right tools and resources to succeed.”

What’s next?

According to the chancellor, more details about the steps the government will be taking to tackle late payments will be released in the next few weeks. In the meantime, adds Solna founder Kaushan, small businesses and freelancers also need to step up and make more use of the technology and data available to them to help them decide who is a risk, and who isn’t.

Small business advice: How to avoid late payments

Late payments are the scourge of small business, but knowing where you stand and what questions to ask can help protect you in worst case scenarios.

1. Due diligence: Know your customers

When working with a new business customer, due diligence can go a long way. Before contracts or invoices are drawn up, research the company to find out if they have the means to pay, if they have assets in the UK, and finally make sure the scope of work clear and measured so there’s no room for dispute. You can start by accessing this free resource: https://www.gov.uk/get-information-about-a-company

Key questions: What is the name and trading style of the business you are working with? Are they trading under a different name?  Have they registered multiple businesses under the same license? If it’s not a limited company, who are the company owners?

Use a credit reference agency to check up on potential customers. Can they afford to pay an invoice? The more information you have on the cash flow and credit of the businesses you work with, the stronger your position when demanding they pay on time.

Another aspect of due diligence involves looking at how other suppliers of the business have fared. Are they willing to share references from other suppliers? Does the business have a Trustpilot rating?

2. Definite clear scope of work and payment terms

Discuss and agree the exact scope of work, deliverables and payment terms with customers before accepting an order.

Key questions: Are you able to establish timelines and payment terms with potential customers? Are they willing to agree to your terms in writing? Are you assuming they will abide by statutory terms?

Include the payment due date clearly on all invoices and in the body of your email when filing the paperwork. Include text in your invoice to stipulate your right to charge interest on late payments.

Standard wording example: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.’’

Whether or not you actually charge the customer is at your discretion, but having this in writing can help your case.

3. Chasing payments

If your invoice isn’t paid on time, set up a process you can follow in a timely manner. Start with a phone call to your contact in the business to ask about your payment. In many cases, especially if you’re dealing with another small business, chances are that the finance team missed your email or overlooked the deadline date. A simple call could sort out the issue without dispute in this case.

If the debt still isn’t paid, send out a letter before action can help to clear up a dispute without the need for the issue to be taken to court.

If the letter goes ignored and payment is still overdue, consider raising a complaint with the Small Business Commissioner, appointed by the government specifically to address poor payment practice. You can do so here: https://www.smallbusinesscommissioner.gov.uk. The Small Business Commissioner may then contact the business that owes you money and urge them on your behalf, or even threaten to name and shame the business for late payment.

At this stage, if the business pays your invoice, you may want to reconsider working with them in the future to avoid a fraught relationship.

Do you find yourself chasing payments on a monthly basis? Share your story with us, or any questions you have at editors@businessadvice.co.uk

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ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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