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The topic of late payments has often been highlighted as one of the biggest obstacles for small businesses owners, with a recent Federation of Small Businesses (FSB) survey revealing 30% of its members’ bills are paid late. Even more damningly, almost nine in 10 of these overdue payments were said to have been delayed by over a month.
Whether a client has a valid excuse for tardiness or not, unpaid invoices can be an enormous cause of stress for a worker who depends on current cashflow to pay bills of their own. In many instances, it can make self-employment difficult or even unfeasible. As you might expect, there isn’t a shortage of opinions on how to improve the situation.
Back in April this year, Labour leader Jeremy Corbyn announced that if the party won the next General Election, it would consider punishing big businesses with fines if they failed to pay their suppliers on time.
“Cash is king for any business, and big companies are managing their cash by borrowing – interest-free – from their suppliers”, Corbyn told the press at the FSB.
“Some of the biggest names in business are holding cash piles that don’t actually belong to them… It’s a national scandal. And it’s stopping businesses from growing and causing thousands to go bust every year”.
It’s worth noting that Experian, the source for Mr Corbyn’s figures, and many of the businesses named, immediately disputed how the figures had been used by the Labour Party. But this doesn’t detract from the essential point that late payment continues to be a problem which disproportionately hurts small firms and the self-employed.
FSB National Chairman, Mike Cherry, said:
“Small firms are facing a late payments crisis. We know from our research that around 50,000 small firms a year go bust as a result of unfair and lengthy delays in big business customers paying what they owe. Others often have to take out loans to cover the gap. These poor practices and wider supply-chain bullying have to stop.”
Last Parliamentary term, the UK Government announced the creation of the role of Small Business Commissioner, who will have the job of settling late payment disputes between small firms and large clients. This is based on an a successful similar project in Australia, which has reportedly solved more than half the cases it took on, at just 30% of the cost of alternative legal action.
Anna Soubry, who was Small Business Minister when the role was announced, said:
“My experience from talking to bigger businesses at the highest level is that when they discover what’s happening, they are as horrified as anyone else would be… They say, ‘That’s not right. That’s not the ethos of our business’ and they sort it out. That’s why the small business commissioner will be so valuable.”
Additionally, in order to make paying on time “a reputational boardroom issue”, large businesses will soon be required to share information on their payment terms and the average time taken to pay invoices. This is known as “duty to disclose” and kicked in April 2017.
The FSB’s Mike Cherry called the transparency reforms “vital, but not sufficient”.
While these moves are promising, there is much more that can be done to truly improve the culture of late payments. The Entrepreneurial Audit, (a joint project from the RSA and Crunch), has put forward several other policy ideas to reduce the burden of late payments on small businesses in the UK.
For example, it’s not just the largest businesses disadvantaging the smallest. The Audit suggests that the medium-sized businesses should also abide by the aforementioned “duty to disclose” regulations.
The report also recommends increasing the maximum interest rate it is possible to charge on late payments. Suppliers are currently able to charge 8% annually (plus the Bank of England’s base rate – currently 0.25%). If you’re owed £2,000, this equates to just £165 spread over a year, or 45p per day. It’s argued that this is nowhere near a strong enough disincentive to pay suppliers promptly.
In addition to raising rate, it’s proposed that the charges could be made compulsory, meaning businesses wouldn’t have to worry about appearing greedy or impatient when applying interest as they would know that everyone else does it to, rather than optionally as it is now.
Finally, it’s recommended that the Government establishes a Right to a Written Contract for transactions over an agreed amount. Notably, the ‘Freelance Isn’t Free Act’ in New York City made such contracts mandatory last year for any engagement which amounts to more than $800 over a four-month period. This could be replicated here in the UK, ensuring that both parties have a written contract in place clearly outlining the conditions of payment.
We look forward to hearing your thoughts on these policy proposals; please do leave any further suggestions in the comments below!
If you’re having trouble getting paid what you’re owed, we’re here to help. Download our free Late Payment Reminder templates, or get in touch with the friendly Crunch Collections team, who specialise in helping you get paid without alienating your clients.
Payment on account is not something that is widely known about among people who have never been part of the Self Assessment system. Learn more now!