Late payment a threat to SMEs

The Credit Crunch is inevitably contributing to a delay in payment to businesses, particularly vulnerable SMEs. Money owed to small businesses shot up by 40% from £18.6 billion in 2007, to £25.9 billion in 2008, according to Bacs. And who knows where the figure is at this time, no doubt substantailly higher.

This attack on cash flow is probably the biggest single cause of company failure. For example Barclays state that more than 750 companies failed in the South East in 2008 due to late payments. And dont forget that late payment means additional interest on that company overdraft, put at a staggering £33 million this year according to Barclays.

Last year the government launched it's Prompt Payment Code, with signatories agreeing to pay suppliers within the contact terms for payment. But so far only 350 companies have signed up! No doubt they are not prepared to commit given the economic uncertainty. And the Code itself appears to acknowledge the failure of the law brought in back in 1998 to allow companies to claim statatory interest from late payers.

This was the Late Payment of Commercial Debts (Interest) Act 1998 The biggest problem remains commercial pressure, some may call it blackmail by the big boys. Anyone trying to recover the interest will no doubt struggle to get repeat orders, and who know whether there is a blacklist for anyone trying to get justice under this procedure.

If all else fails and you are not worried about repeat orders it might be worth making a claim under the Act. It only applies to commercial debt, and so will not help where the late payer is not a business or public sector orgainisation. For contracts entered into after 2002, all companies are subject to the law. If there is no contract credit period for payment, and no convention such as 30 or 60 days has been established, then the default period is 30 days. If the parties have not agreed a late payment interest charge, which must be a "substantial remedy" and not a token gesture, it is 8% over the Bank of England base rate. And it is also possible to claim compensation to cover the costs of recovery, £40 if you are owed up to £999.99, £70 if you are owed between £1000 and £9999.99, and £100 if you are owed £10000 or over. And dont forget that if you have to sue for recovery you can claim this enhanced interest and compensation.

So for example, if you are owed £10000, and the date of payment under the contact was 1 March 2009, the daily rate will be £2.3288 based on a rate of 8.5%, so at 8 August 2009 you will be owed £374.94 late payment interest, and can claim an additional £100 compensation. If the customer refuses to pay you can take them to court and claim the interest and compensation, as well as court costs. Even if you have been paid, but paid late, you can still use the law to recover the late payment interest and the compensation.

I would advise that you include details of the right to claim late payment in your correspondence with the debtor, and in any chasing telephone calls, as this might encourage them to pay up. Tell them how much the interest and compensation will be. Use it as a bargaining chip to get prompt payment.

For advice on late payment of business contracts and dispute management contact:

Nigel Musgrove

Business and Litigation Solicitor