Keeping SMEs Afloat with Prompt Payments
The average SME is owed over £6,000 in outstanding payments which, as research from the Federation for Small Businesses found, contributed not only to a slowdown in cash flow, profit growth and a negative impact on the wider UK economy but most critically contributing to a lot of these companies becoming insolvent.
The same research found that some 50,000 SMEs closed in 2014 due to the effects of late payments.
Many of these were able to close down through dissolution, however a significant proportion were also forced into formal insolvency procedures. This is particularly the case in the construction industry, with a prevalent culture of contractors paying as little as possible for as much work as possible.
Many large firms use their dominant market position to pressurise SMEs into terms like this, forcing them to take the cost of the chin for almost four months.
For some SMEs the distance between supply and payment is too much and can actively send them into insolvency.
Recent legislation has passed to help solve the problem, including the introduction of late payment interest, a Prompt Payment Code which commits voluntary signatories to pay on time, the introduction of a Small Business Commissioner with powers to “name and shame” organisations found to be late payers and new rules requiring medium and large businesses to publicly report how effective their prompt payment practices are twice a year to the government’s Duty To Report website.
Chancellor Philip Hammond specifically addressed the problem in his 2019 Spring Statement when he announced a commitment to take further action to tackle the issue of late payments from large businesses to SMEs. Among the new rules would be a requirement for audit committees to review their company’s payment practices and report on them in annual accounts.
We are also still awaiting the outcome of evidence submitted to a government consultation on Creating a Responsible Payment Culture where SMEs were encouraged to report their experiences of payment practices and suggestions for the best way to ensure all companies have responsible payment practices in their supply chains.
There is a legal way for SMEs to claim recompense for businesses receiving a late payment as they can legally claim interest and debt recovery costs if another business is late in paying for goods or a service from them.
Late payment is officially defined as when a payment has not been made 30 days after either a customer has received an invoice or after the issuer has delivered the goods or provided a service.
Statutory interest can be charged on late payments which is 8% plus the Bank of England base rate for business to business transactions.
There can also be a fixed debt recovery costs added to the late payment charge which can range from £40 to £100 depending on the amount of debt owed.
Contact one of our expert team of advisors for an initial chat and we will be able to advise you on any funding options available to you and how to claim back what is legally owed to you too.