Encouraging news for small businesses with big debtors?

Late payment of invoices is a huge problem for small businesses, with research showing that almost half of invoices issued by small businesses are paid after their due date. According to the Federation of Small Businesses (FSB), late payment causes the failure of approximately 50,000 small businesses (defined as those with fewer than 50 employees) per year. Even if a business does survive, the impact on its cashflow will mean that it is not able to grow or to operate as effectively as it otherwise might. The FSB estimates that solving this problem would add £2.5bn to the national economy. 

This is shocking, yet unsurprising. Small businesses are often at the mercy of larger customers, many of which implement delayed payment practices as standard. Faced with the bleak prospect of either (a) not winning work, or (b) winning work, providing the goods or services and then having to wait several months to get paid, most small businesses will have no choice but to accept the latter. 

An attempt was made to address the issue with the introduction of the office of the Small Business Commissioner (SBC) in 2017. The SBC’s role is to assist small businesses with recovering unpaid invoices and to investigate the poor payment practices of larger companies. 

In a further move to protect small businesses, this month has seen the introduction of a Private Members Bill in to Parliament – the Small Business Commissioner and Late Payments Bill – which:

  • provides that all payments must be made within 30 days;
  • reduces the point when statutory interest starts to run to 30 days;
  • gives powers to the SBC to impose large fines on non-payers;
  • introduces a statutory time limit for raising (21 days) and resolving (30 days) payment disputes and provision for unresolved disputes to be referred to the SBC;
  • expands the remit of the SBC to include the construction sector and public bodies;
  • requires the SBC to publish ranked payment performance data for large businesses and public authorities (thereby naming and shaming the worst offenders);
  • prohibits certain payment practices, such as purchasers demanding discounts for early payment of invoices; and
  • obliges a company’s auditors to report on the payment performance of the company. 

If successfully passed in to law, these measures will no doubt be welcomed by small businesses. However, late payment practices are so ingrained in some sectors and institutions, that it remains to be seen whether the legislation will be sufficient to force the culture change that is needed to shift late payments from being the norm, to being unacceptable. 

In the meantime, what can small (or, indeed, all) businesses do to protect themselves against unpaid debts? It is always advisable to have well drafted terms and conditions that include detailed payment terms (not only how much is payable, but when it falls due) and provide for interest to be charged in the event of late payment. If the customer’s payment obligations are clear and unambiguous, it will be easier to hold them to account. If a customer insists on using its own contract, review the terms carefully to see what they say about payment. Do not be afraid to challenge them: often, a company’s standard terms can be varied, even if they are presented in a “take it or leave it” manner. 

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.