Getting paid – how to stop late payments from impacting your business

By Daniel Jenking, a Partner at Mayo Wynne Baxter.

For many businesses, being paid late (or not at all) by other businesses can be a major headache. Late payments alone cost small and medium-sized businesses £22,000 a year on average and leads to around 50,000 business closures a year.

In September the government announced it will consult on measures to address late payments practices and new laws are being introduced which will require all large businesses to include payment reporting in their annual reports.

However, rather than relying on the government to implement measures, what can businesses do to put themselves in a better position?

Charge interest

It is possible to charge interest on late payment. The right to charge interest can be included as an express term in the relevant contract, but even if the contract does not expressly provide for interest, then under the Late Payment of Commercial Debts (Interest) Act 1998 interest may be claimed. The Act gives suppliers the right to charge interest on debts for the payment of goods or services at 8% a year above the Bank of England base rate plus a fixed sum (ranging from £40 to £100, calculated by reference to the size of the debt). Reasonable costs for recovering the debt (less the fixed sum) are also recoverable. 

The right to charge interest is greatly under-used in practice. A report by the Federation of Small Businesses has estimated that 80% of small businesses don’t charge interest on overdue sums. It could be that businesses are unaware of their rights or are hesitant, believing it may damage ongoing relations with their customers. Not charging interest though potentially encourages customers to use their supplier as a cheap source of credit to improve their own cash flow.

Limit credit

Where feasible, the best solution is to ensure that payment is made at the outset, before the supply of goods or services is actually made, which removes the risk of late payment entirely. Alternatively, partial payment could be sought initially, with the balance payable when the contract has been performed. For some businesses this might not be practicable, but it is worth considering whether there is scope to introduce it.

To the extent payment can’t be sought upfront, then, as many businesses do, set a level of credit whereby once the amount outstanding, or the duration of which it has been outstanding, reaches a certain figure, further supplies aren’t made.

Customer checks

Carrying out a credit check to assess the financial standing of a company before contracting with them can be useful. The information will help in making an assessment in whether to take additional measures for that particular customer, even if such measures are not implemented for all customers generally. This might for example be to require payment in advance or a guarantee of payment from a parent company or an individual.

It is particularly important to identify the precise company or entity which is entering into the contract or placing an order.  It is not uncommon to have discussions with a particular company only to find that they use a subsidiary (which may be newly formed or of lesser financial standing) to enter into the contract or place the order.

Prompt payment discount

As a financial incentive for prompt payment, a discount can be provided if payment is made before a specified day or within a specified period. This can help align the interests of both the customer and supplier, because they both stand to benefit from the arrangement.

At a practical level, the process makes the accounts receivable processes slightly more complicated because it will be necessary to verify that the amount received on each occasion accords with whether or not a discount is due.

VAT, where chargeable, also needs to be considered.  Your accountant should be able to advise on the appropriate steps to take, which may involve issuing a credit note to adjust the price or issuing invoices with appropriate wording.

Contractual terms

The underlying contract, whether an individually negotiated contract or standard terms of business, presents an opportunity to include terms to encourage payment.

For example, terms can be included providing that:

• where a customer is paying by instalments, all future instalments become immediately due and payable if any instalment is not paid on the due date;

• in the case of goods delivered in instalments or services provided over a period of time, allowing the supplier to withhold further deliveries or services while any payments are overdue;

• where multiple orders or contracts are made, the late payment in relation to one order or contract allows the suspension of supplies in respect of all others;

• if goods are being supplied, that title to the goods does not pass to the customer until payment is made, with a right to repossess the goods;

• termination of the contract on the grounds of late payment.

Rather than just rely on any one of the measures mentioned in this article, a combination of several is likely to be more effective.

For businesses that need to borrow to finance their cashflow or who operate with a tight cash flow, a little bit of time spent in putting in place the right arrangements is going to be time well spent. 

www.mayowynnebaxter.co.uk