Owner Managed Business update - July 2019
How to ensure your business gets paid on time?
One of the biggest issues facing businesses is late payment affecting cash flow - this can be crippling if you are an SME or smaller owner managed business and for larger businesses, late payments can at the very least can hamper growth.
So what steps can you take to ensure that the cash keeps flowing?
- Credit Checks - a Dun & Bradstreet survey found that 36% of SMEs don't credit check their customers. A credit check can help to verify that those who you propose to do business with have historically paid their debts on time and highlight those who have repeatedly failed to pay or may be having solvency issues.
- Payment Reporting - from 6 April 2017, all large businesses must publish information on their payment practices and performance twice a year. These reports are available free here and provide a means of checking how each company is performing regarding payments.
- Payment Codes - there are various voluntary codes of practice relating to the payment of invoices. The Prompt Payment Code (the Code) was created by the UK government in 2008 and now has over 2,200 signatories. It provides SMEs with a framework to check and enforce the terms of contracts with the signatories to the code. The Code promotes payment of invoices within the agreed credit terms, promotes dialogue if there are delays in payment and requires that signatories do not seek to retrospectively change payment terms. However, the Code is voluntary and there are no enforcement powers beyond expelling those that consistently breach its terms, as has now happened to Rolls-Royce, Vodafone, BHP Billiton and several other listed companies.
- Self help - the most obvious step is to ensure that you have a contract in place with your customer which specifies terms of payment that you can live with.
A well drafted payment clause will specify when you are entitled to issue an invoice, how long the customer has to pay and what consequences may flow from a failure to pay on time.
With written terms in place you are in a much stronger position to chase payment as soon as it becomes due.
What can you do if it all goes wrong?
Issue a Statutory Demand
Where a debt is overdue and your debtor is uncooperative you could seek redress through the courts to recover the debt.
A statutory demand is a written notice in a prescribed form which a creditor can serve on a debtor when an overdue debt exceeds £750 (or £5,000 for an individual). If the debt is not paid within 21 days of service of the demand there is a presumption that the company on whom the demand was served is unable to pay its debts and a court can issue an order to wind the company up (or make an individual bankrupt).
A statutory demand is a serious matter for the company receiving it and therefore can be a powerful tool to collect payment. Aside from the possibility of being wound up, a debtor company may be keen to avoid any breach of their banking covenants as well as avoid triggering any termination provisions in its other contracts. A statutory demand may not always be the best option and should only be used where the debt is undisputed and after taking legal advice.
What about interest?
Consequences of late payment of a debt typically include the application of contractual interest on the debt, with 4-5% interest often seen in the current market. You may also wish to consider an express right to withhold further performance of the contract until your outstanding invoices are paid and perhaps to delay the transfer of title (ownership) to any goods until you have received payment in full. Such provisions provide a contractual encouragement of the 'stick' variety. A 'carrot' to encourage timely payment could be to offer a discount if payment is received in full within, say, 7 days.
If your contract is silent regarding the consequences of late payment you may be able to claim statutory interest pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (1998 Act). The 1998 Act will apply interest of 8% over the Bank of England base rate to unpaid B2B debts (with some narrow exceptions) unless the contract provides for a "substantial remedy" for late payment.
The 1998 Act also entitles the creditor to statutory compensation for late payment starting at £40 for a debt of less than £1000 to £100 for a debt of £10,000 or more.
Beginning legal proceeds in either the High Court or the Country Court depending the claim value is the ultimate enforcement steps if a customer refuses to pay. It is important to comply with the Court rules, including the Pre-Action Protocol, and to consider carefully in advance how to balance the rewards and risks of litigation.
This is particularly important where a customer is based outside the UK. For significant overseas customers, it may well be worthwhile including specific contractual clauses to make debt collection easier if they breach payment terms.
How the Small Business Commissioner can help you?
Following a consultation from the Department Business, Energy and Industrial Strategy (BEIS) in 2015, the position of the Small Business Commissioner was created and the Commissioner was appointed in October 2017. The Commissioner's role is to support small businesses in resolving payment disputes and encouraging a culture of prompt payment.
The Commissioner's main function is to act as an in-house complaints handler for small businesses which are having issues with late payments from larger businesses. If the complaint is within the Commissioner's scope, the Commissioner will investigate the complaint and make non-binding recommendations. If the company does not comply with the recommendations, the Commissioner will publish a report aimed at naming and shaming the suppliers who do not pay their invoices. The threat of a public report can be a powerful tool in forcing larger companies to comply. To view the reports and for further information on the Commissioner, please click here.
The Commissioner also provides advice and information on supply relationships and can direct small business to the appropriate services such as regulators.
An additional note on financial products
Credit insurance insures against payment default and some suppliers in high volume, low margin businesses will routinely take out credit insurance.
Other businesses use invoice discounting, a form of finance where a lender provides a cash advance against the assignment of receivable balances.