Accounting software provider Xero detailed in an early March 2024 set of quarterly data that at the end of 2023 small firms were holding unpaid debt valued at £1.6 billion. The firm’s analysis is based on the accounts of numerous small businesses that use its software.

Among the other findings was the worrying fact that small businesses were experiencing delays that averaged 6.1 days beyond agreed payment terms in the last three months of 2023.

Xero isn’t alone in its findings. For years the Federation of Small Businesses has been trying to deal with the problem and noted that in 2022 “52% of small businesses experienced late payments”.

The problem outlined

Nicola Langley, head of legal at the BPIF, says that late payment has been a concern for members for some time. In particular, she’s seen a trend in recent years for “some customers wanting to move to 60- or 90-day terms, rather than the usual 30 days. This can put pressure on to suppliers’ cashflow, and increase risk for the business.”

However, and interestingly, Jonathan Rush, knowledge counsel, Technology & Commercial Transactions at Travers Smith, has seen something different. He refers to the government’s recent Payment & Cashflow Review Report which suggests that “the trend is actually towards paying a greater percentage of invoices on time and also that the UK is not hugely out of line with comparable EU economies.”

He thinks that the situation may have been driven in part by the reporting requirements of the Payment Practices and Performance Regulations 2017, which require larger businesses to publish statistics on late payment.

Even so, Rush reckons that while the trend may be moving in the right direction, “the estimates of the total sums of money involved suggest that there is still a significant problem”.

 It appears, from his standpoint, that the current regulatory framework for late payment in the UK continues to rely heavily – perhaps too heavily – on “businesses voluntarily deciding to ‘do the right thing’ by paying on time and there is little in the way of significant sanctions for businesses that choose not to do so.”

And that goes to the nub of the matter as Langley sees it. She says that “a lot will depend upon the respective bargaining power of the parties. If it is a repeat customer and the trade with that customer represents a high proportion of the supplier’s sales, the supplier will be under commercial pressure to agree [to less favourable terms]”.

Fixes fail?

Various governments have tried to fix this perennial problem. There was the Late Payment of Commercial Debts (Interest) Act 1998 which provided businesses with the statutory right to charge interest and a fixed administration fee on overdue invoices. 

In April 2020, the law was amended to state that no payment term longer than 60 days may be agreed if the creditor is an SME, and the debtor is not.

Both Rush and Langley think that the Act can be effective. However, as Rush points out, while it provides an effective remedy for late payment which the courts will enforce if none has been contractually agreed, “suppliers tend not to sue unless the relationship with the customer has completely broken down.” Indeed, there have been few cases brought.

And Langley concurs. While she sees suppliers with terms that include clauses to charge contractual interest in the event of late payment, few use it. However, she thinks that “the ability to charge interest should be considered a useful tool, especially in circumstances where the business relationship has come to an end.” She adds that “one way to look at this is to recognise that if you are giving a customer credit terms, you are effectively lending them money, and if they had to borrow that money from somewhere else, then they would be paying interest.”

Rush thinks the same, noting that interest at the Bank of England base rate plus 8% and if no credit period has been agreed, payments will be regarded as late after 30 days, quite a generous remedy.

He does emphasise though that “it is possible to oust the statutory right to late payment if the contract contains ‘some other substantial remedy’ such as an express provision for lower rates of interest on late payment and/or sometimes longer credit terms.

“So, if we ask, ‘has it been successful in ensuring that suppliers benefit from 30-day payment periods and a generous remedy for late payment which they are actually prepared to use?’ The answer is in most cases, no, it hasn’t.”

In fact, Rush considers that Payment Practices and Performance Regulations 2017 have been more successful as they’ve nudged larger businesses into paying more invoices on time.

Moving on, 2017 brought the Small Business Commissioner (SBC), an independent public body set up by the government under the Enterprise Act 2016 to tackle late payment and unfavourable payment practices in the private sector. 

The SBC seeks to provide general advice and information, handle complaints about payment issues and direct small businesses to existing dispute resolution services where appropriate. Its website claims that over £8m in unpaid invoices have been recovered under its watch. 

Of the SBC, Langley says it “offers lots of useful advice for small businesses including tips on how to communicate with slow paying customers, and practical guidance”. She notes that its website also links to the Prompt Payment Code, “where a supplier can check to see if their customer has signed up to a voluntary code of practice for prompt payment”.

However, in reality the SBC is toothless; as the government’s website says, it can make “non-binding recommendations on how the parties should resolve their disputes”. The Association of Accounting Technicians (AAT), an accounting body, has since 2016 been calling for the SBC to be given the power to impose financial penalties to those who persistently fail to pay 95% of invoices within 30 days. This would give it much greater influence when investigating complaints.

Rush isn’t impressed and considers the figures for the SBC poor: “Its 2022-23 Annual Report says that it had [just] 387 requests for assistance. In its defence, it has quite a narrow remit and so is not always in a position to help – and where it does investigate, it cannot apply any sanctions other than naming and shaming the business which has paid late.” He notes too that “smaller businesses are likely to be disappointed with the government’s decision to drop proposals to give the SBC powers to impose fines for late payment.” 

And of course, there is another problem faced by the SBC – a recurrent theme according to Rush – in relation to attempts to tackle late payment. He’s referring to the fact that “small suppliers typically don’t want to alienate customers, so they are only likely to pursue a complaint if they think their relationship with the customer is irretrievably broken.”

It’s relevant here to state that from April 2024 companies seeking government contracts exceeding £5m must demonstrate prompt invoice payment within an average of 55 days.

Legal options

All of this leaves the troubled printer with only one route – going to law. But apart from the expense it may not be all it’s cracked up to be.

Statistics that Langley cites, for the period April to June 2023, show that on average County Court claims were taking between 52.3 weeks and 78.2 weeks from the date of issue of the claim to the date of trial.

But beyond the delay, she says that “the costs associated with taking court action are variable depending upon the amount of the debt, and whether interim applications are necessary.” She adds that court fees can be added to a claim, but “legal fees will not be recoverable for small claims”.

And while she says that “it’s not usually difficult to prove that a debt is owed, getting a judgment in your favour does not automatically guarantee payment”. In other words, creditors may still need to take enforcement action by instructing bailiffs, or where the debtor is a limited company, considering winding-up proceedings, all of which add both cost and time to the process.

Also, and this is a concern, Langley has seen customers who know the rules and may be serial non-payers and so “use the legal process to continue to delay payment whilst the move on to a new supplier, and so the threat of legal action does not always produce results.”

Rush turns to the government’s Money Claim Online service which is available for claims under £100,000. He says that “it’s relatively straightforward and in theory could proceed fairly quickly to a judgment if, for example, the customer simply fails to respond”.

He too notes the difficulties surrounding a judgment, but says that “threats of going to law are sometimes sufficient to get customers to pay up. But if a customer has just run out of money, they’re unlikely to work”.

Change company processes

There’s precious little point being a busy fool and both Rush and Langley think it better to ensure that customers are trustworthy before trading. As Rush puts it: “I’d advise a firm to carry out due diligence on a new customer’s financial position before they start supplying them, and where possible, negotiate to be paid either upfront or in a series of instalments.” 

Langley, thinks it key to have a consistent approach to on-boarding customers: “Have a credit application form, set a credit limit for each customer, and stick to it. Do due diligence on customers by getting a credit reference, and update your information on a regular basis.” She says this because “a customer with a good credit rating six months ago may not have a good rating now”.

Rush thinks the same precisely because it means “that you’re in a position to chase customers for late payment before other creditors catch on that there may be cashflow problems”.

He also recommends a contractual right to suspend further work, “which can sometimes act as a powerful incentive to get customers to pay”.

And in relation to terms, the obvious one to consider is retention of title. But it’s only of use when goods are sold. And as Rush highlights, they have their own peculiarities since sellers either have to register them as a charge (which is burdensome) or need to impose requirements on the buyer such as keeping goods separate from others until they’ve been paid for. As he says, “I doubt that this obligation is complied with very often. And if your goods have been mixed up in the buyer’s warehouse with lots of goods from other suppliers, it will be difficult to identify which goods to seize in the event of non-payment.” Overall, he doesn’t claim that contractual terms are a panacea, but “they can help and it’s definitely worth putting some time and effort into getting them right”.

It needs to be said that the BPIF publishes model terms of business for standard print work. Here Langley makes it clear that “terms of business should be written in plain English and need to be communicated to customers before or at the time an order is placed”.

Indeed, the biggest mistake that she sees printers making is failing to communicate terms to customers at the right time. She suggests placing them on trade credit application forms and with quotes and estimates, so that if the quote is accepted then so are the terms of trade – putting them on invoices is too late.

The BPIF also provides members with an overdue accounts toolkit, guidance notes and template letters including payment reminders and letters of demand, guidance on completing a county court claim and how to calculate interest.

There are other options to consider such as discounts for early or on-time payment. Langley and Rush differ on this though.

Langley would not recommend discounts as “this indicates that your pricing policy is going to add a penalty for late payment”. Rush, however, can see the merit of a discount but suggests possibly “charging a higher price for agreeing to a request from the customer for a longer credit period”.

Regardless, Langley warns of customers who put in a few small orders and pay on time, but then follow up with surprisingly large orders: “If an order is over the credit limit you set for that customer don’t be afraid to ask for payment up front.” Alternatively, Rush suggests, if there are any doubts, “seeking additional financial protections such as a parent company guarantee or credit insurance”.

And lastly, there’s the option to use invoice factoring and discount which similarly monetise outstanding invoices but differ in who owns (and collects) outstanding monies.

While discounting leaves control of debts with the printer, factoring, reckons Rush, “presents a risk of losing control, which can sometimes harm commercial relationships, especially if the factor is somewhat aggressive in its debt collection tactics”. But there again, as he points out, “if the customer is unlikely to come back for repeat business, there may be nothing to lose from effectively handing over the debt collection to a factor”.

Langley, in contrast, cautions that late payment may have a genuine reason at its root such a dispute over quality or non-delivery; she thinks that here the supplier would want to deal with the issue themselves.

Summary

It appears that the government seems not to be in any hurry to change the law to help creditors. This leaves firms having to be careful who they supply to and on what terms while trying to build a cash buffer to allow for late payments.