Indeed, figures from the government published in a House of Commons briefing paper, Late Payment of Debts, in February (2017), suggest that SMEs are owed around £26.3bn in overdue payments, that 30% of payments to SME are late, and that the average value of each late payment is £6,142. These numbers are not to be sniffed at.

Overdue debt has a much greater effect on printers than it has on suppliers of goods that can be recovered if payment isn’t made; the mere process of printing means combining of products into a bespoke finished item. Nevertheless, firms can feel uncomfortable about confronting the issue head on, particularly when dealing with a long-standing client which has previously been a prompt payer or represents a large chunk of revenue. 

If the approach is too firm, you risk losing a valuable client. Too soft, and it’s possible that the debt won’t be taken seriously and the situation will remain unresolved.

There are countless stories around the industry about how disruptive late payment of debt can be. Take the administration of Anton Group at the end of March this year. The company went to the lengths of acquiring one of its customers to avoid being hit by a significant bad debt. However, the acquisition failed to generate the sales expected and seriously strained the company’s cashflow causing its demise.

So how can printers minimise the problem of late payers? Is it a question of, as one unnamed printer said, “getting a feeling for the individual before me and then, if necessary, pricing the job so that they don’t come back”? Or do printers need to take a more nuanced approach so that they don’t win a battle but lose the war – that is, get paid but lose the client? It’s a question that requires the judgment of Solomon.

Procedures

One option is to do what Andy Davis, managing director of Tangent On Demand, a digital creation specialist, does. He gets to know his customer – regularly. “We present the actual work we do, and then on an ongoing basis arrange meetings once a month to show them new work we have produced. Most of our work is bespoke so there is always something cool and interesting to show.” In other words, Davis makes a point of building a firm relationship with all of his clients.

While Davis’ approach works for his company, Matthew Halton, a commercial law solicitor and debt recovery expert at Stephensons Solicitors, says that firms need to be more circumspect over late payment. He says the situation can be avoided altogether if a business designs and follows a clear set of procedures. He adds that billing for services promptly and efficiently means the business is more likely to be paid in the same manner: “Have a clear set of terms and conditions of business for your customer and make sure that these are clearly communicated to your customer before the start of the contract as this will avoid misunderstandings and disagreements in future.” Why? Because in legal parlance it’s a case of the ‘battle of the forms’ – whoever is last to ‘register’ their terms before a contract is accepted or executed will have theirs apply should the matter go legal. 

Halton also points out that properly set out terms do more than just ensure payment. A well-drafted contract can include accelerator clauses that ensure that if one invoice is not paid within terms then all invoices then fall due. They can also ensure that the business is not contractually obliged to continue delivering products or services when it is not getting paid for work already delivered. And then there are matters of defining what is meant by delivery, issues of liability, and the setting out of termination rights.

Charles Jarrold, chief executive of the BPIF, also considers contract terms to be very important: “Terms of payment should be agreed and then stuck to.” He thinks that disputes can be another source of delay – printers need to look at terms carefully and ensure that they can’t be used as a loophole to delay payment without valid reason.

Part of the process involves designing a consistent approach to late payment. This means, as Halton puts it, “drawing up a credit control procedure so your customers know what to expect and how they will be notified and how the process will escalate”.

Davis has had to change his company’s internal processes to match a changing market: “As a business we used to invoice at month end, but now we invoice daily and chase purchase orders every two days.” Davis says he has gone to great lengths to explain to all his staff the importance of good paper work, purchase orders and prompt invoicing.

There is an alternative, suggests Jarrold. He says that following best practice is a good start but that printers should run credit checks on clients and get trade references. “Further,” says Jarrold, “if you have credit insurance, the credit insurer will often determine whether to provide cover, and if they will not, this will be a red flag. And if you still have concerns, consider getting directors to guarantee the debt, and if you’re buying the paper on behalf of a client, get that paid up front as this is an ‘out of pocket’ expense.”

So, when does a payment officially become late?

In the absence of any contractually agreed terms, the law says that a payment is classed as being late after 30 days for business transactions and public authorities once they’ve received the invoice, or 30 days after the goods (or services) have been delivered, if later.

Cultural change is needed

The problem with the law is, as Jarrold sees it, that “it’s a step in the right direction, but as with most business issues, the problem is both legislative and cultural. We need to change business culture so that leaning on suppliers for extensive periods of credit is seen as what it is – bullying and a misuse of power.”

Jarrold’s point is that late payment hurts SMEs and that payment uncertainty stops printers planning for the future: “While the Prompt Payment Code established in 2015 (written by the Chartered Institute of Credit Management), is a step in the right direction, much more can be done to safeguard small businesses. Receiving payment promptly ranked as number one in our members’ priorities for UK print.”

These points are backed by the Federation of Small Business (FSB). It produced a topical guide, Managing cash through Brexit, which offers tips on reducing exposure to late payment. Its spokesman, Ben Baruch, also advises “checking if the company is registered to the Prompt Payment Code while conducting research to see whether other small businesses have experienced problems over poor payment practice at that (prospective) client.”

Avoid the law where possible

Although well-established processes can be invaluable in lowering the risk of non-payment, businesses must not allow process to stifle the dialogue with customers. The point is, Halton notes, that it’s good to talk: “If a usually friendly relationship between the business and customer is suddenly replaced by more severe written notices simply because of a late payment, the customer might feel disenfranchised and be less inclined to cooperate – they’ll dig their heels in or worse, pay but never return.” He expands – “listen to your customer and try to understand their situation. Find out why payment has not been made – if you understand the situation you can respond appropriately and arrange a suitable method of repayment.”

Printers need to be proactive. Consider Davis’ approach: his staff watch out for invoices that go over the agreed payment terms: “Ultimately, we want a relationship with clients where we can speak to them and ask them to put pressure on their finance department to pay. This normally always works.” 

Of course, the harsh reality of life means that there is nothing to be gained from demanding payment if a customer simply cannot afford to do pay. Taking a more flexible stance will allow recovery of some of the money.

Looking to the future

Rules and legal processes never stay static, especially when it comes to the ever-evolving world of debt recovery. Yes, the government is bringing in compulsory payment practices reporting for large firms, but in Priorities for Print, the BPIF’s forward planning document, the organisation calls for the government to take more action. In particular, Jarrold says the BPIF is urging all public agencies to be forced to pay SME invoices within 30 days – with enforced compliance; public sector contractors to be made to pay sub-contractors within the same period as the main contractor is paid; all suppliers to the public sector to have to sign up to the Prompt Payment Code; and pushing the newly appointed Small Business Commissioner to tackle late payment culture as a priority while providing practical support for businesses to be able to challenge late-paying customers.

Ian Cass, managing director of the Forum of Private Business, knows from experience that SMEs are naturally reluctant to resort to the late payment legislation for fear of losing future contracts. In fact, as Cass sees it, it’s rarely used. He says: “The Forum understands these concerns which is why we have re-launched the Forum’s Hall of Shame whereby we look to name and shame those with unfair payment terms.” And there are some very big names listed – go to www.fpb.org/your-voice/hall-of-shame to see them. 

Allied to this, Cass wants those firms breaking the new payment practices rules to be forced to note their non-compliance in their annual accounts.

Baruch is pleased that tackling late payments is now a key part of the government’s corporate governance agenda, but thinks more should happen. “The comprehensive and regular duty to report is the first step to combat a business culture that feels like one where it is okay to pay small firms late. It is not okay; we estimate that 50,000 business deaths could be avoided every year if only payments were made promptly. The FSB wants the introduction of policy measures which cumulatively and over time, improve the contractual environment for smaller businesses.”

The last word goes to Davis. He says he never needed to go to the law and nor does he feel the need to use invoice factoring and discounting products (which speed up cashflow). For him what works is being different: “We are moving to more bespoke one-off projects, which also helps in holding consistent pricing as there is less competition. The work we were producing five years ago, other suppliers can produce or it can be bought online for less.” In effect, by being different, clients are more resistant to moving to rivals and by extension, it makes it more important that they pay their bills.

So, will payment practices change long term? Only if the political will to tackle it translates into real action. 

A new debt collection process

Any business collecting debts from an individual will, from 1 October, need to follow a new set of rules called the ‘Pre-Action Protocol for Debt Claims’.

Sarah Carlton, an associate at Fox Williams LLP, says the changes have been brought in because of the large numbers of debt claims in the courts. She notes that the protocol only applies to businesses (including sole traders and public bodies) claiming payment of a debt from an individual including sole traders –“it does not apply to debts owed by a business to another business (except that of sole traders) and nor will it apply to claims issued by HMRC.”

Carlton explains that currently a business creditor will issue a ‘Letter Before Claim’ to a debtor in order to give them chance for the matter to be settled before court proceedings. The protocol seeks to formalise the process even before a letter is issued. In practice, this will likely mean more work will need to be undertaken before even a simple debt claim is issued, the intention being that the parties try to settle the matter without the need for court proceedings. 

“Whether you intend to send a Letter Before Claim over an unpaid debt,” says Carlton, “the protocol aims to encourage early communication between the creditor and debtor without reverting to court proceedings in the first instance.”

Failure to comply with the new protocol will result in case management directions and possibly cost sanctions if the matter proceeds to litigation. 

The new process requires that a standardised Letter Before Claim be sent to a debtor with particular information.

From the Letter Before Claim being sent (by post) to the debtor, the debtor will have 30 days to respond. If the debtor fails to pay the claimed debt, another letter must be issued from the creditor giving a further 14 days for the debtor to respond before starting court proceedings. 

Their response may request more information or state that they’re seeking legal advice. Either way, the creditor will need to allow more time before proceeding – upto another 30 days.

As to what happens if the parties cannot agree or resolve the debt repayment, Carlton says both parties should take appropriate steps to resolve the dispute without starting court proceedings and should consider other forms of Alternative Dispute Resolution, for example a without prejudice meeting or mediation.

“Clearly the protocol allows what may seem generous time allowances at each stage,” says Carlton, adding, “time will tell, whether individuals will use the new rules to frustrate collection actions and if the front-loading of costs onto the creditor pre-hearing may prevent creditors from pursuing all of their debt actions.”

Minimise the risks of late payment

Eliminate the risk of disputes by understanding who you are selling to. This means checking their status – sole trader, limited company or partnership – and invoicing the correct entity. Similarly, ensure that the person placing the order has authority to do so.

Design and use a credit application form for those jobs that are not cash with order. Back this up with a credit reference check. Paying a small fee to the likes of Experian, Equifax and Dun & Bradstreet will be insignificant to the cost of a bad debt.

Stay close to your customers and talk to them so you know what their trading plans are, and if they might affect your relationship with them. Make sure that no change to the company you trade with slips through unnoticed.

Ensure that agreed payment terms are documented and agreed into the future so you are protected against terms that might subsequently be imposed. If your customer tries to impose worse terms retrospectively, and they are a signatory to the Prompt Payment Code, raise a challenge at promptpaymentcode.org.uk and the Chartered Institute of Credit Management can intervene on your behalf.

Check a client’s standard payment terms on the Prompt Payment Code website or, for a ‘large company’, on the Duty to Report portal scheduled to be available from mid 2017. If they’re asking you for terms longer than their standard, you need to understand why and negotiate them down, or ask for something in return.

If you grant longer payment terms than your suppliers grant you, there will be a gap in your cashflow that you will have to fill. Consider talking to your bank or finance company to make sure that access to finance when you most need it won’t be a problem.

Include the words: “We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms” on every invoice, and print your terms and conditions on the back.

Never be embarrassed or afraid to ask for money that should rightfully be in your bank account. If your invoice is disputed for any reason, fix the problem as quickly as possible so the excuse not to pay is removed.

The sooner you notice a payment issue and the sooner you take action, the greater the likelihood of payment – never rely on payment arriving “soon”.

Consider offering a discount for fast (within seven days) settlement of orders. The cost of this will be offset by lower bank fees and less staff time spent chasing late payments.

Pre-litigation

Design a staged process with a view to both gaining payment and maintaining the relationship. Start with a telephone call, then a statement that is then followed by a polite letter that confirms anything the debtor has agreed to do. If this doesn’t work a debt collection agency may need to be involved.

It’s entirely possible that there may be some disagreement or dissatisfaction behind the late or non-payment. Have a dispute resolution process that is covered within the terms of business, which can help provide an appropriate outlet for any grievances and may avoid a late payment situation arising at all.

If the client is intransigent over payment consider the validity of your next steps. You may want to simply write off small debts where the cost of pursuing the client – or the damage it might cause to a relationship - is too great. This may, however, set a precedent that might persuade the client to continue not paying in future.

Where the customer has become insolvent, the chances of recovering debts of any substantial amount are likely to be poor.

Seek advice

Intervention by a solicitor, or even a letter stating your intention, can be a strong signal to the late payer of your determination to recover the amount you are owed. Many solicitors specialise in mediation, allowing for negotiation between the two parties in a formal setting. 

The Late Payment of Commercial Debts Interest Act offers assistance. It allows businesses to claim interest, compensation and, where orders were placed after 16 March 2013, costs of collecting a debt where they exceed the compensation itself.

This legislation only applies to the commercial supply of goods and services and where there is no provision of interest in your own terms of business.

It’s possible to claim statutory interest for a debt at 8% over base rate, along with compensation of £40-£100 per invoice depending on the invoice value. If seeking up to £999.99 you can claim £40 per invoice, between £1,000 and £9,999.99, it’s £70 per invoice, and for amounts over £10,000 it’s £100 per invoice.

It’s also possible to claim interest on invoices that were not paid within the agreed period, but which have since been paid. 

Importantly, customers do not need to be informed beforehand of the likely action that could follow from non-payment. However, highlighting this in contracts may deter late payments. 

The government’s own website (www.gov.uk/late-commercial-payments-interest-debt-recovery/ when-a-payment-becomes-late) offers a basic background primer on the principles of late payment of debt as well as links to debt recovery. There’s another particularly good website with much more detail at payontime.co.uk/the-late-payment-legislation-provides-interest-and-debt-recovery-costs.