Late payments – a challenge for strong and weak businesses alike

Late payments – a challenge for strong and weak businesses alike

May 5, 2023

Late payments, especially by large businesses delaying settlements to smaller ones, have been a bone of commercial contention for decades. Beyond the devastation it causes to the cash flow of the victims, capital investment is often inhibited and at a time when this is so badly needed to boost the UK’s faltering GDP growth.

In theory, an unpaid creditor can charge statutory interest at 8% plus the Bank of England base rate on overdue accounts but fears of disturbing or destroying business relationships deters many from doing so, especially when there is an imbalance of financial power as regards a much larger debtor, or if the delinquent customer is significant to the business.

There have been a number of government policy initiatives aimed at improving payment habits.

Reporting on Payment Practices and Performance Regulations 2017

Since 2017, larger businesses with turnover over £250m, a balance sheet total of £18m and 250 employees (any two of these) has a statutory duty to publish a half-yearly report on their on their payment practices, policies and performance. This information is available to be downloaded from a Government website, although any suggestion that this ‘name and shame’ approach is likely to change the late payment culture is counteracted by concerted complaints about how little awareness there is of the existence and means of access to this key commercial data.

The Prompt Payment Code (PPC)

The PPC is a voluntary code of practice for businesses, administered by the Office of the Small Business Commissioner (OSBC) on behalf of the Department for Business, Energy and Industrial Strategy. It was established in December 2008 and sets standards for its signatories for payment practices between organisations of any size and their suppliers. It is an initiative championed by various business organisations, but most notably by the Chartered Institute of Credit Management.

Unfortunately, however laudable it is, the PPC currently has just 3,724 signatories out of well over 4 million active companies registered at Companies House and compliance remains no more than voluntary for the remainder.

Consultation on the Payment Practices and Performance Regulations

Concern at the continued negative impact on the economy of the UK’s endemic late payment culture has now stirred the government into action once again. A consultation exercise has just closed at the end of April 2023, aimed at assessing whether current regulations should be extended and their overall effectiveness at preventing late payments.

Early reports suggest that there has been a robust response from right across the business community, many stressing the need for definitive rather than tentative measures. For example, the Institute of Directors has published its own ten point plan to improve payment practices.

A carrot and stick approach?

Given the apparent failure of the ‘gentle persuasion’ approach, it may be that a more coercive strategy would work better.

Making statutory interest mandatory

Some dominant buyers limit the impact of the right to charge statutory interest on overdue debts by including a lower interest penalty in the contracts they impose on subservient suppliers. Legislating to make statutory interest mandatory would perhaps focus the minds of exploitative buyers.

Making Prompt Payment Code compliance compulsory

The Government could impose the existing Prompt Payment Code on all UK-registered entities.

Bidding for Government contracts

The Government could prohibit companies, which do not comply fully with the Prompt Payment Code from bidding for Government work.

Tax incentives

There are many examples of software and other technologies, especially process automation, which make it easier to pay or claim payments on time. Tax incentives to encourage adoption of these systems would encourage small businesses and provide them with many more tools at their disposal to counter the late payment habits of their customers.

Inaction will kill small businesses

Every time an invoice is paid late, it creates a problem for the supplier. When it happens to a struggling SME, battling to survive after three years of the worst business and financial disruption in living memory, the risk is that their stakeholders lose money and jobs are destroyed. It is unacceptable that larger, better-funded companies can wreak this havoc without any effective accountability.

Getting advice on late payments

Negotiations with debtors over late payment can be extremely difficult, as can be accessing the extra working capital needed to tide an affected business over the cash flow difficulties it causes. Working with experienced, independent professional advisers on these issues is a sound and productive way to begin to deal with them.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.