What directors need to know about their rights

Getting paid promptly yourself is another issue and something that drives entrepreneurs mad at the best of times and could have potentially fatal consequences for a business in the worst. 

A recent report found that UK small businesses spend more than one working week a year chasing late payments.

Over 56.4m hours last year were spent following up non and late payments with more than half of these taking place outside of regular business hours so eating into valuable personal and family time. 

On average, an SME could be waiting for at least nine outstanding payments with 11% of these being more than 200 days late. 

The Federation of Self-Employed and Small Businesses (FSB) estimated that SMEs are owed an average of £6,142 with most debts due from larger companies. 

It’s not just an inconvenience. The same FSB research found that 37% of respondents fall into cash flow problems as a result and 30% needed to use their overdraft facility to cover costs. 

They say that 50,000 SMEs could be kept in business each year if all payments were made on time – equal to £2.5bn of economic activity. 

Additional data analysis has found that suppliers billing less than £10,000 to large companies did not have their invoices processed until 35 days after the paperwork has been received, meaning that the payment, usually due within 30 days, is already late before the invoice has even been approved. 

This is effectively a cheap form of credit for larger companies!

There has been some action taken taken by government. Prompt payment legislation came into force in the UK in September 2019 which included the penalty of disqualifying large companies from bidding for government contracts if they didn’t achieve a benchmark of 95% payment rate on invoices within a 60 day spell. 

There are also some additional options available for smaller companies to help offset payment delays especially if you suspect or know it’s coming. 

Payment terms are usually defined by the payment terms made when the sale is agreed but if a specific timetable is not agreed than legally a payment is late if the customer does not pay it within 30 days of receiving the invoice or within 30 days of the delivery of goods or provided service if this is later. 

Time to act

Statutory interest can be charged on late payments to a maximum of the Bank of England base rate plus eight percentage points – today this would be 8.75%.  

This rate is an annual one but could be charged daily so a £10,000 debt for example would accrue £875 annual interest or £2.40 daily. This sum is multiplied by the number of days late that the bill stands. 

Additionally, a business is entitled to charge a fixed sum to cover costs incurred while chasing the payment – including time. This can vary from £40 for payments worth less than £1,000 up to £100 for bills of £10,00 or more. 

To claim, issue a new invoice to the customer detailing what it is owed. If disputed then legal action would enforce payment but sums of less than £100,00 can be pursued through the small claims court. 

Alternatively if a business owes more than £750 then you could just cut to the chase and issue a statutory demand. 

It gives the recipient 21 days to pay in full with increasingly serious consequences if they don’t, including the threat of a winding-up petition being brought against them. 

Not being paid is a serious matter for any business but for a small or medium enterprises it could literally be the difference between survival and insolvency. We find regular instances of businesses facing voluntary liquidation as a result of late payments.

If your company is in deep water through no fault of its own or you’re having trouble balancing payments that you’d like to pay straight away but can’t – get in touch with us. 

We can arrange a free and convenient initial consultation with one of our trained expert advisors. We can look at what the underlying issues are that are hampering the business and look at what you can do to make things easier and get things back on an even keel quickly.