The issue of late payments to SMEs continues to be controversial. The UK government is quick to point out that it led the way in late payment legislation, yet many critics (and business owners) feel that the law is not robust enough to help them.
But the laws that already exist are useful, and it’s up to you to make the most of them, says Adam Home of Safe Collections.
What the Law Says
The latest version of European Directive 2011/7/EU was introduced across the EU in 2013, and it echoes previous efforts of successive governments to reign in the rampant late payment problems seen in some sectors of the UK economy.
The basics of this law are:
- Suppliers and clients are free to set their own period for payment, providing it’s fair to both parties
- If no contractual payment term is in place, payments will be considered late after 30 or 60 days, depending on whether the client is a public authority or private business
- Clients must pay interest on the amount they owe once the payment is overdue, at a rate of 8% + base rate
- Clients must pay fixed costs on invoices paid beyond terms: £40 if the invoice is under £1,000, £70 if more than £100 but under £10,000, or £100 if higher than £10,000
- Suppliers are entitled to recover the difference between the fixed costs and any “reasonable costs” incurred in recovering the late payment
These laws apply to all contracts that conclude on or after 16 March 2013, in all 28 EU countries.
The government’s Department for Business Innovation and Skills has also launched the Prompt Payment Code, although we’ve rarely seen suppliers sign up to it. It offers good intentions, but no guarantees and we know of a number of signatories both large and small who have a demonstrable record in arbitrarily delaying payment to suppliers.
Do It Yourself
While we welcome the fact that there are clear laws on late payment, the onus falls on you to be proactive and organised. Setting clear payment terms, and carefully vetting your credit customers are still the easiest way to prevent overdue invoices, and you should be setting these expectations for your client, before you deliver goods or services.
Unfortunately, the law cannot protect you against the awkward stand-off that arises when a client suddenly decides to stop paying. In these cases, the SME has to tread a fine line between getting paid as soon as possible whilst maintaining a positive business relationship. Few businesses will apply late fees and interest or chase the debt aggressively, if they fear losing a key source of income or alienating a profitable client. This is a situation where citing the law can help.
Make It Easy
Late payments are unfortunately part of the culture at many companies. They drag out payments because they know they can get away with it, and because it’s seen as a way to artificially inflate their own available cash flow at no charge.
For things to change we need two things. Number one companies big and small need to see this as an ethical issue and stop delaying payments just to make their own books look better, and two suppliers need to consistently apply the laws that are in place to protect them.
If you’re faced with an invoice that your client can’t or won’t pay, try downloading Safe Collection’s iCalc app which makes calculating late fees and interest easy, quick and accurate.
Just tap in the due date and the amount, and the iCalc app instantly shows you what to charge in statutory late payment costs and interest. It’s secure, anonymous and contains no advertising or tracking software.