Press Releases (Archived)
Better late than never?
David Thomson, Chief Executive of Close Invoice Finance, looks at the growing problems presented by late payment of invoices
According to a worrying recent report by the UK Payment Index, nearly half of UK invoices are overdue with potentially devastating results for creditors, especially SMEs. If private individuals decided not to pay their credit card, telephone or water bill, they would expect to be charged interest, if not to have the service cut off altogether. While the public understands this, however, it seems British businesses do not. The Government recognised this growing problem back in 1998 with the Late Payment of Commercial Debts (Interest) Act, allowing small businesses in England and Wales to charge interest and reasonable recovery costs on overdue debt; the Act was expanded by the EU in 2002 to cover larger companies as well. However, recent surveys suggest that the legislation has had little effect on the speed of payments.
As always, the smallest firms suffer the most - according to the Credit Management Research Centre at Leeds University Business School, the worst offenders are large firms with enough clout to hold suppliers to ransom. (Extraordinarily, coming a close second was the NHS). And despite the laws, many SMEs are simply unable to afford to go to court to enforce invoice deadlines. The result? UK businesses could be losing up to £20m annually in unpaid bills, with up to 10,000 small companies going broke each year.
Naturally, Close recognises this unhelpful attitude - factoring and invoice discounting are the company's core products - but Close also recognises that the situation is getting worse and that only authoritative government intervention will help minimise the distress caused to so many companies because of the late payment culture.
Businesses, especially SME's, have always suffered from late payment by creditors. While more needs to be done to address this issue, I suspect that it will never be eradicated completely. While the Government has a role to play in this respect along with other opinion formers, it is important that those firms that are affected right now, know that they have a solution in factoring and invoice discounting.
The Government has a vested interest in making firms pay on time - the report suggests the Treasury could be losing £10bn each year in lost VAT and corporation tax. But though the Department for Trade and Industry takes the issue of late payment seriously, CMRC Director Professor Nick Wilson says that "even government departments did not improve their own payment speed over the time of the survey - with the Treasury itself coming in at just 84% of invoices paid on time."
Is it an issue for more legislation? Liberal Democrat business spokesman Brian Cotter recently called for late payers to be "named and shamed in an annual list so that small firms can...make an informed decision before entering into business with them". But PLCs are already required, under the Companies Act 1985, to report their average bill payment times in their annual reports - barely a third, according to the Federation of Small Businesses, bother to do so.
The FSB's Stephen Alambritis added his view to the mix, saying that the problem is a lack of enforcement: "Ministers can send out as many press releases as they like saying companies are morally wrong, but nobody is grabbing the issue and saying 'this is law and it should be followed through' ".
So what can a business do to protect itself from overdue payments and the resulting cash flow problems? Naturally, Close welcomes your business: but don't just take our word for it. The DTI's Business Link website (
www.businesslink.gov.uk ) agrees that debt factoring is a good way to sidestep debts due to late payment - selling debt to a factoring company like Close can improve cash flow and provide credit insurance. It also recommends setting terms of trade out clearly to avoid conflict in the first place, credit-checking companies, and offering incentives for prompt payment, such as discounts.
Recognising that settling outstanding bills in court is too crippling for many SMEs, Business Link suggests that this should be viewed as a last resort only. The department's Better Payment Practice Campaign ( www.payontime.co.uk ), which seeks to improve the UK's payment culture, asks businesses to sign their code promising to:
1. Agree payment terms at the outset of a deal and stick to them;
2. Explain your payment procedures to suppliers;
3. Pay bills in accordance with any contract agreed with the supplier or as required by law;
4. Tell suppliers without delay when an invoice is contested, and settle disputes quickly.
With the UK's average payment delay two days longer than the EU's, it is not only SMEs that are at risk - it is the UK's reputation and standing as a country in which to do business. Without prompt payment, our reputation - and our economy - will continue to suffer.
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