SMEs owed £225bn from late payments

Late payments are an issue for more than half (53%) of Britain’s small and medium-sized businesses (SMEs), according to Zurich’s latest SME Risk Index.

The total owed to British SMEs by their customers currently amounts to over £225bn, with one in five (20%) owed more than £25,000, one in ten (8%) £100,000 or more, while 1% are waiting for upwards of £1m.

A threat to business

Late payments are causing serious problems for many SMEs, with 41% experiencing significant cash flow problems as a result.

Even more worryingly, two thirds of SMEs (67%) agree that issues with late payments are leading to some SMEs being forced to close.

“£225bn owed in late payments to British SMEs is an enormous sum,” says Jason Eatock, Head of SME at Zurich. “It is no surprise that many have experienced cash flow problems as a result.

“We have been warned about a ‘cocktail of threats’ to the economy, and small businesses will need all the capital at their disposal to weather a potential storm.”

Calls for action

Late payments are a longstanding issue for British businesses, but governments have yet to take decisive action.

This may explain why only a quarter (28%) of SMEs feel that the Government is doing all it can to tackle the issue, compared with half (49%) saying more support is needed for businesses affected by late payments.

Encouragingly, however, the Department for Innovation and Skills has recently published a detailed consultation paper on the matter, showing this issue is now firmly on the Government’s agenda.

Furthermore, the Enterprise Bill, currently making its way through parliament, includes a number of measures to target the problem of late payments. These include the creation of the Small Business Commissioner – a new authority charged with addressing power imbalances between small and large firms, including instances of ‘supply chain bullying’ and late payments. There is also the offer of a mediation service to resolve late payment disputes quickly, and at a fraction of the cost of going to court.

How to tackle outstanding payments

Despite many businesses feeling that more needs to be done, existing legislation can already provide SMEs with some much needed assistance.

When faced with late payments by customers, businesses have several statutory tools at their disposal, including the ability to charge interest and recoup debt recovery costs (see boxout).

Late payments guidance for SMEs

• If no term has been specified, a payment is considered late after 30 days from the day a customer receives their invoice, or 30 days from when goods/services are delivered, whichever is later
• If no interest terms have been agreed via contract, statutory interest can be charged at 8% plus the Bank of England’s base rate
• In addition to interest, businesses can charge a fixed rate (between £40 and £100 depending on the size of the debt) for the cost of recovering the debt. Suppliers can also claim for reasonable additional costs.

See the Government’s detailed guidance for full information.

The Government has issued detailed guidance on the matter, such as defining when a payment can be considered ‘late’, how much interest can legally be levied, and the level of debt recovery fees that can be charged.

Strong contract management

Understandably, businesses may have concerns over enforcing their strict legal rights, including the fears of losing future business; in fact 58% of SMEs say they will not claim late payment compensation for this very reason, and only 20% ever claim the interest or debt recovery costs they are legally entitled to.

However, fears of losing future business are often unjustified, and having clear terms and conditions from the outset can actually help foster lasting customer relationships. When each party is clear on their responsibilities, including those relating to timely payments, this reduces the chance of either party being surprised or disappointed by the actions of another.

Additionally, current Government proposals, such as those set out in the Enterprise Bill, may offer some recourse for those suffering late payments, but will provide little help to those businesses reluctant to challenge their customers. Good contract management is therefore important if SMEs are to discourage late payments and avoid issues arising in the first place.

For more information on how to manage this and other risks, please contact your local Zurich Account Executive.