5 ways to tackle late payments (Guest Post) » SMEInsider

5 ways to tackle late payments (Guest Post)

Cash flow is the life blood of every business. If you cannot settle your debts as they fall due you are very likely in financial distress and may be technically insolvent. There are many reasons why businesses end in administration or liquidation but cash flow problems as a result of the business not being paid on time for its goods or services are often a significant contributory factor.

Successive governments have recognised this as a major issue, particularly for small and medium sized businesses. The Department for Business Innovation and Skills has recently consulted on draft late payment regulations to be issued pursuant to the Small Business, Enterprise and Employment Bill discussed further below. But what steps can you take to protect your business now?

There are several options open to small and medium sized enterprises (SMEs) to ensure that their debts are paid on time by corporate customers.

1. Self help

The most obvious step is to ensure that you have a contract in place with your customer which specifies terms of payment that you can live with.

A well drafted payment clause will specify when you are entitled to issue an invoice, how long the customer has to pay and what consequences may flow from a failure to pay on time.

2. Interest

Consequences typically include the application of interest on the debt, with 4-5% interest being most often seen in the current market. You may also wish to consider an express right to withhold further performance of the contract until your outstanding invoices are paid and perhaps to delay the transfer of title (ownership) to goods until you have received payment in full. Such provisions provide a contractual encouragement of the ‘stick’ variety. A ‘carrot’ to encourage timely payment could be to offer a discount if payment is received in full within, say, 7 days.

If your contract is silent regarding the consequences of late payment you may be able to claim statutory interest pursuant to the Late Payment of Commercial Debts (Interest) Act 1998. This Act will apply interest to unpaid B2B debts (with some narrow exceptions) unless the contract provides for a “substantial remedy” for late payment.

Typically a “substantial remedy” would be an agreed contractual rate of interest (although the courts have held that a contractual rate of only 0.5% above base failed this test). The Act also entitles the creditor to statutory compensation for late payment starting at £40 for a debt of less than £1000 to £100 for a debt of £10,000 or more.

3. Statutory demand

Where a debt is overdue you could seek redress through the courts to recover the debt. However, rather than engaging in legal proceedings, another option is to consider serving a statutory demand on a defaulting customer.

A statutory demand is a written notice in the form prescribed under the Insolvency Rules 1986. A creditor of a company is entitled to serve a statutory demand on the company at any time when the debt owing by the company remains due and exceeds £750. If the debt is not paid within 21 days of service of the demand there is a presumption that the company on whom the demand was served is unable to pay its debts. A court has jurisdiction to wind a company up based on that presumption.

A statutory demand is a serious matter for the company receiving it and therefore can be a powerful tool to collect payment. Aside from the possibility of being wound up, the debtor company will be keen to avoid any breach of their banking covenants as well as avoid triggering any termination provisions in its other customer and supplier contracts. A statutory demand may not always be the best option and should only be used where the debt is undisputed and after taking legal advice.

4. Codes of practice

Some comfort may be gained from dealing with customers who have signed up to a supplier / payment code of practice. The government supported Prompt Payment Code currently has in excess of 1700 participants, including a significant proportion of the FTSE 100. The Code promotes payment of invoices within the agreed credit terms, promotes dialogue if there are delays in payment and requires that signatories do not seek to retrospectively change payment terms.

However, the problem which neither voluntary codes nor legislation address is that customers with greater economic power than their suppliers are often able to dictate harsh payment terms. The recent criticism in the national press concerning the payment terms reportedly imposed by a major brewing company (one supplier quoting 120 days) is one example of growing discontent with the behaviour of big businesses to their supply chains. Once such terms are contractually agreed (however unwillingly by the supplier) then, provided that they are adhered to, the customer will not be in breach and the supplier must simply wait to be paid.

5. Draft late payment regulations

The late payment regulations, which BIS recently consulted on, are effectively an acknowledgement that the government is unwilling or unable to impose acceptable payment terms on big business. Rather these draft regulations seek to force companies to be transparent regarding their payment practices by requiring regular publication of that company’s payment terms, statistics regarding the number of invoices paid late and the proportion of invoices paid over 30, 60 and 120 days.

It has been suggested that knowing details of a potential customer’s payment terms / practices will assist a supplier in deciding when to deal with that company. However, for many suppliers things are not that straightforward and a customer, such as one of the big supermarket chains, may be their only option. However, given the recent press surrounding payment practices, requiring publication of such details and encouraging a ‘name and shame’ approach through the press and social media may yet prove to be the most effective tool in improving payment practices.

Adrian Jones is a corporate partner at the international law firm Trowers & Hamlins