Late and extended payment biggest challenge for SMEs

It is clear that it is SME's who are bearing the brunt of the cash flow crisis caused by late payment or extended payment terms imposed by their biggest customers. A recent report by Touch Financial, an invoice financial broker, suggested that of 200 businesses questioned over half had changed their credit terms in the last 12 months, imposing longer payment terms on their suppliers. This in turn is having a big impact on the suppliers cash flow and ability to invest, as the banks still have their hands deep in their pockets.

So what can be done about this? In reality very little. In theory a business cannot impose fresh terms on a supplier mid contract without their agreement. But the supplier may have little room to manoeuvre, and fear losing the customer if they refuse new terms.

But when it comes to complying with the contract payment terms, if the customer does not pay on time the  Late Payment of Commercial Debts (Interest) Act 1998 may help.This allows a commercial rate of interest to be recovered, but the biggest problem remains commercial pressure, some may call it blackmail, by the big boys. Anyone trying to recover the interest will no doubt struggle to get repeat orders.

If all else fails and you are not worried about repeat orders it might be worth making a claim under the Act. It only applies to commercial debt, and so will not help where the late payer is not a business or public sector orgainisation. For contracts entered into after 2002, all companies are subject to the law. If there is no contract credit period for payment, and no convention such as 30 or 60 days has been established, then the default period is 30 days. If the parties have not agreed a late payment interest charge, which must be a "substantial remedy" and not a token gesture, it is 8% over the Bank of England base rate. And it is also possible to claim compensation to cover the costs of recovery, £40 if you are owed up to £999.99, £70 if you are owed between £1000 and £9999.99, and £100 if you are owed £10000 or over. And dont forget that if you have to sue for recovery you can claim this enhanced interest and compensation. Even if you have been paid, but paid late, you can still use the law to recover the late payment interest and the compensation.

It is not possible to exclude the right to claim interest under the Act in any contract. Even if you have provided a late payment interest clause in th contract, it must still comply withthe interest provisions of the Late Payment Act by providing a "substantial remedy" for late payment.  In a recent case a clause that provided for interest of 0.5% above base was held not to be an unreasonable term under the Unfair Contract Terms Act and regulations, but it was held to be in breach of the Late Payment  Act as it did not provide a "substantial remedy" for late payment. So even if you have contracted for a low rate of interest on late payments, the courts can still intervene.

I would advise that you include details of the right to claim late payment in your correspondence with the debtor, and in any chasing telephone calls, as this might encourage them to pay up. Tell them how much the interest and compensation will be. Use it as a bargaining chip to get prompt payment.

For advice on late payment of business contracts and dispute management contact:

Nigel Musgrove

Business and Litigation Solicitor

Tel: 01285 847001