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Late Payment of Debts

Based on information provided by our clients it is apparent that small businesses who contract with larger private sector businesses are regularly paid late and outside their credit terms.  This is despite the fact that as long ago as 1998 legislation was introduced under the Late Payment of Commercial Debts (Interest) Act to combat this problem. 

This Act introduced a system whereby interest could be charged on debts as well as compensation payments which depended upon the value of the debt.  This legislation recognised that considerable problems were caused to businesses by persistent late payers but it is clear that this legislation and the Government's Prompt Payment Code have not had the desired effect.

In the current climate all businesses, no matter how big or small, want to be paid as quickly as possible and in turn want to hang onto their own money for as long as possible and the reality is that those businesses who are best able to achieve these two objectives are the bigger businesses who smaller businesses cannot afford to upset because they may simply stop dealing with them.

The EU directive which was enacted in Spring 2013 said that only in exceptional circumstances should payment terms be more than 60 days but anyone who is in business will know that the bargaining power in deciding such matters is invariably with the purchaser rather than the supplier! Even if terms for payment are agreed at a shorter period, the reality is that if payment is not made on time a supplier has only a limited number of options.  They can make a complaint and to seek to recover interest and compensation costs or issue proceedings.  In either case the supplier will often be aware that there are other businesses who will be only too happy to step in and pick up their work and rightly feel that such action will result in a loss of business. 

Cash flow is the life blood of small business. Time and again I see businesses fail because of either delays in payment or of a complete failure to make a payment and it is well known that if one business fails the knock on effect can mean the failure of other businesses with whom they deal.

All of this shows the importance of trying to agree credit terms which work for the supplier as well as the purchaser and actively pursuing debts as soon as invoices are overdue. 

Since its introduction in 1998 The Late Payment Act has been amended to allow creditors to claim the costs of the reasonable expenses incurred in pursing a debt in addition to compensation.  This provides the supplier with greater ammunition to pursue those invoices and the purchaser a greater incentive to pay promptly.

For more information about this please contact Fiona Gaskell at fiona.gaskell@clough-willis.co.uk or 0800 083 0815.