Written by Zahra Saeed
Posted on 01/12/2014

Dangers of late payment to SMEs

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A senior member of the House of Commons Communities and Local Government Select Committee, has recently warned local authorities that they could be looking at millions of pounds in late payment penalties following upcoming changes to commercial debt legislation. The recent amendments mean councils such as Brighton and Hove – which has admitted to late payment of 5,437 invoices over the last two years – could face fines of up to £5.4million.

Mary Glindon MP, who had prompted a debate in Parliament in July over the dangers caused to small and medium-sized businesses (SMEs) through delays in payment from local authorities, said in her recent letter: “Councils need to prepare now for the forthcoming changes which, in any event, are vital for local businesses in their areas and will help boost economic growth by addressing the cash-flow crisis.”

What are the legislative changes?

The Late Payment of Commercial Debts (Interest) Act originally came into force in 1998, and has been subject to recent amendments from the Late Payment of Commercial Debts Regulations 2013. It allows SMEs to claim fixed compensation of between £40 and £100 for any invoice not paid within 30 days. Businesses also have the right to charge interest (presently at 8.5%) on late payments. 
What’s more, all public authorities must publish their payment performance in detail and also calculate and apply the financial penalties as stipulated in the Act. This is obligatory even when these have not been paid, which will allow for more scrutiny of councils by local businesses.
The legal changes also allow companies to claim the reasonable costs of recovering the debt where these are not met by the fixed compensation sum, which is likely to mean that SMEs are now more likely to seek legal claims for commercial debts. However, this only applies to contracts made on or after 16 March 2013. 
With a noticeable increase in late payments to SMEs over the last five years, this new legislation is a step in the right direction towards curbing delays in the settling of commercial debt.

Other ways to curb late payment of commercial debts

Delays in payment can cripple cash flow in small businesses, and local authorities are certainly not the only offenders when it comes to late settling of invoices. To avoid late payments, companies should try to carry out credit checks on all new clients and terms and conditions should clearly and strongly set out any penalties or interest incurred as a result of payment delays. A fixed fee solicitor’s letter detailing the consequences of court proceedings can also prove an effective deterrent.   
Charlie Mullins, CEO of Pimlico Plumbers, recently revealed in an interview with  that the company moved to payment on completion once they realised that they were owed more than £80,000 from customers. 
“If a customer knows they have to fork out on completion, they engage more and police the job better, meaning less complaints and less call backs,” he said.
If your business is struggling as a result of late payment, it’s important to check your invoicing processes and, like Mullins, put systems into place to avoid falling into debt.
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