SOS: Save Our SMEs – the scourge of late payment
Late payment is said to have led to the failure of many small and medium sized enterprises. The Federation of Small Businesses suggests that the number could be as high as 50,000 a year.
The efforts by government to date to address poor payment practices have been largely ineffective. There is the Late Payment of Commercial Debts (Interest) Act 1998 which allows suppliers to charge interest on late payments, even if that right is not included in the terms of the contract. But smaller businesses rarely feel able to exercise that right. And there is the Prompt Payment Code and the requirement for large businesses to report their payment practices – go to this website to see the public reporting of this – but this “naming and shaming” has had very little impact.
The main reason these measures are ineffective is that they still allow large businesses to set their own payment terms. It’s not unusual to see them including terms in their contracts that they will pay within 60, 90 or even 120 days of invoice. The right to interest only arises once payment is overdue. And with a 120-day payment provision, it’s not difficult for them to report that they have paid all debts within their contractual terms.
The Business, Energy and Industrial Strategy Committee (a House of Commons Select Committee) has recently stated that a statutory requirement should be introduced that businesses must pay within 30 days. The Committee also recommended that the Small Business Commissioner should be given the power to fine large businesses who pay their suppliers late.
There is clearly a problem here. But it is contrary to UK culture for the government to interfere in contractual terms in this way and it is unlikely that such action will be taken. This leaves the onus on SMEs to try to agree shorter credit terms with their customers and to continue to chase for prompt payment.
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