UK: One Minute Briefs - Don't be forever in our debt, just pay up on time.

UK: One Minute Briefs - Don't be forever in our debt, just pay up on time. - New legislation on late payments may have little effect.

by
Last Updated: 31 Aug 2010

New legislation on late payments may have little effect.

It is all too common for small companies to go out of business while they are waiting for payment for the goods or services they have provided.

The Federation of Small Businesses (FSB) estimates that 5,000 of the 40,000 small businesses that went to the wall in 1996 suffered their demise for this reason. The newly-elected Labour government has promised legislation to allow businesses to charge interest on those companies that are tardy with their settlements. But by no means all small businesses expect to take advantage of the rights that they will soon have in law.

Steve Alambritis, spokesman for the FSB, feels that the Government's plans, for all its good intentions, will have little impact. 'Small companies will be reluctant to rock the boat, particularly with major clients.' Alambritis even goes so far as to suggest that, 'culprits might even end up paying the interest owed instead of the principle sum'. Chartered surveyor Barry Smith of BTS Consultants, also has his doubts. 'Late payment can cause huge cash-flow problems, but I would not charge interest, because it's totally impractical. I would just upset my clients. This is something that I can't afford to do, particularly if I was after repeat business.' Some earlier attempts at charging interest have resulted in threats from the client of the sort feared by Smith. Donald Martin, owner of Bloomfield Books in Sudbury, Suffolk, says, 'I had two large booksellers running at 120 days to pay me - despite my terms being 30 days. I started charging interest but they said if I wanted to do that they would not deal with me any more.'

However, Donald Fry, owner of Electron Optical Services in Manchester, has already successfully collected debts owed through threatening interest on late payments. His company only has an annual turnover of between £500,000 and £1 million and, understandably, needs all the cash it can get. 'I have charged interest four times on late payers in the last two years at 2.5% per month after 30 days. I didn't get the interest but it did flush out the money owed. And,' he adds, significantly, 'we still have the clients'. Other small businesses feel the pinch of late payments so acutely that they feel they have no option but to run the gauntlet of charging interest. 'We would charge interest on amounts owing over £1,000 on an account running at 60 days instead of the stipulated 30,' says Rob Totterdell, accounts manager at caterers Occasional Cuisine in Seale, Surrey, which has an annual turnover of £280,000 - 'Late payments affect our overdraft on which we are charged interest and we end up having to pay VAT on money we haven't even received.' If there is such widespread doubt that interest payments are the stick with which to beat late payers, then what is? Martin believes that the best answer is for companies 'to have to publish their record of payments for all to see - and for small claims courts to be made more user-friendly, so they recover the money owed rather than leave it to the person to chase it'. Alambritis is also clear on the subject of the small claims court: 'We want the small claims courts' limit raised to £5,000, the publication of a "shame list" of bad payers and the withdrawal of badges of excellence from late paying companies.' The Forum of Private Business welcomes the prospect of legislation, but spokesman Dave Harrop says: 'It has got to be the right sort. The company should have six years to put in a claim.' An offending business, Harrop argues, would then risk interest on multiple invoices over a long period and 'the principle sum will already have been paid. It side-steps the "fear factor" in charging interest at the time of the debt.'.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today