Late and extended payment biggest challenge for SMEs

Posted: Thursday, 16 September 2010 @ 10:32

It is clear that it is SME's who are bearing the brunt of the cash flow crisis caused by late payment or extended payment terms imposed by their biggest customers. A recent report by Touch Financial, an invoice financial broker, suggested that of 200 businesses questioned over half had changed their credit terms in the last 12 months, imposing longer payment terms on their suppliers. This in turn is having a big impact on the suppliers cash flow and ability to invest, as the banks still have their hands deep in their pockets.

So what can be done about this? In reality very little. In theory a business cannot impose fresh terms on a supplier mid contract without their agreement. But the supplier may have little room to manoeuvre, and fear losing the customer if they refuse new terms.

But when it comes to complying with the contract payment terms, if the customer does not pay on time the  Late Payment of Commercial Debts (Interest) Act 1998 may help.This allows a commercial rate of interest to be recovered, but 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.

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. Even if you have been paid, but paid late, you can still use the law to recover the late payment interest and the compensation.

It is not possible to exclude the right to claim interest under the Act in any contract. Even if you have provided a late payment interest clause in th contract, it must still comply withthe interest provisions of the Late Payment Act by providing a "substantial remedy" for late payment.  In a recent case a clause that provided for interest of 0.5% above base was held not to be an unreasonable term under the Unfair Contract Terms Act and regulations, but it was held to be in breach of the Late Payment  Act as it did not provide a "substantial remedy" for late payment. So even if you have contracted for a low rate of interest on late payments, the courts can still intervene.

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

Tel: 01285 847001

Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
Call Nigel on +44 (0)1285 847 001 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

Comments

  • There are no comments for this page - click here to be the first

Need legal advice for your business? We can help

Directors

Directors
Practical advice and legal support for company owners and directors.

Disputes

Disputes
In dispute with a customer or supplier? Get practical advice and support.

Your legal advisor

Your legal advisor
Board level legal advice without the costs of an in-house lawyer.

Speak to a lawyer

Speak to a lawyer
Thank you. Your response is great, very straight to the point! Hopefully this will bring an end to the matter. I will certainly be recommending your services as I am very impressed with the prompt dealing of this matter.
Janet Burbidge

Get legal updates

Enter your email address to receive our monthly Blog Newsletter


We will keep your email safe in accordance with our privacy policy.

Get the FREE definitive guide to solving business disputes

Speak to a lawyer

Get legal updates

Enter your email address to receive our monthly Blog Newsletter
The Law Society
Top