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Late payment is costing UK firms dear

Many small firms are at risk of insolvency by being forced to wait up to four months for invoices to be paid, new research by the Federation of Small Businesses (FSB) has revealed.

Nationally, one in four businesses becomes insolvent because invoices are paid late, causing 4,000 UK companies to fail in 2008 and costing firms £180m in interest in 2009.

Research of FSB members found one in three were waiting longer to be paid since the credit crunch. Large brands were found to be the worst offenders by asking to extend their invoice payment terms by up to 95 days – sometimes midway through a contract.

Chris Burke, commercial litigation partner at Pearson Hinchliffe Commercial Law, said: “Habitual late payment by debtors is now the biggest concern reported by small business clients."  

"At a time when commercial credit and banking services are being squeezed, maintaining cashflow has taken on an even greater significance.”

He added: “Many firms are waiting longer to be paid during the credit crunch. The implications for the firms that do not enforce their statutory right to interest on delayed payments can be serious. Many find that they in turn end up paying their creditors later which affects their reputation and ability to attract future work.”

The Late Payment of Commercial Debts (Interest) Act introduced in 1998 gave small businesses a statutory right to interest on money owed to them, and to claim the costs of debt recovery.

“The legislation has focused managers' attention on the fact that winning and completing work is actually less important that being paid. The former is immaterial if the latter does not follow within a specified amount of time.”

Chris Burke added: “I understand why small firms are hesitant to resort to the law for fear of loosing vital contracts. My advice would be to do everything you can at the outset to make sure you get paid on time. Spell out your payment terms with the customer before undertaking any work, invoice within 24 hours of completion of work or delivery, and consider doing a credit reference check, which can be carried out at relatively low cost and should flag up any problems that a proposed customer may have had or any uncertainty as to its financial stability.”

John Wright, National Chairman, Federation of Small Businesses, commented: "Poor payment practices in both the public and private sector can drastically affect cash-flow for small firms at a time when business owners are doing their best to hold on to precious funds."

“Larger organisations must be given a loud and clear message that they must stop using the recession as an excuse to use small firms as source of credit. The FSB would like to see as many private and public sector organisations as possible signed up to the Prompt Payment Code to ensure we can put an end to this plague and change the culture of late payments for good.”

Pearson Hinchliffe Commercial Law has a specialsit Commercial Litigation and Debt Recovery department. Please contact us for further advice.

Submit a no-obligation debt recovery enquiry here.

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Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk