Yet more new regulations to curb late payers, but will they be enforced?
Just like the smell of a rotten egg, the topic of late payments just refuses to go away. For what seems like eons, governments have laudably sought to crack the problem of late payment of debt. However, despite their declared aims, government has been unable to persuade corporates of the need and merits of making payments promptly.
Persuasion has failed and so has, let’s be honest, legislation. The Late Payment of Commercial Debts (Interest) Act 1998 has had little real effect.
However, the new Labour government has a stated policy of seeing what it can do to ease the situation. As noted in BDN last September, late payment costs Small and Medium-Sized Enterprises (SMEs) around £22,000 per annum, which, according to the Federation of Small Businesses (FSB), leads to the closure of 50,000 businesses a year. Indeed, research from the FSB revealed that every quarter in 2022, 52% of SMEs – some 2.8 million firms suffered from late payments.
As a result, the government has said that it is to consult on new legislation that “will hold larger firms to account and get cash flowing back into businesses.” Further, the government intends to make it mandatory for all large firms to publish payment data in their annual reports – a form of indirect naming and shaming if you will.
Beyond that, existing late payment performance reporting regulations that require large companies to report their payment performance information every six months will be enforced. The government wants responsible directors at non-compliant companies who don’t report their payment practices to face criminal prosecutions with the risk of potentially unlimited fines and criminal records. The consultation is expected early on in 2025.
Does all of this sound familiar? It should do – there was a 33-page document from the government of the day on the subject in February 2015, a response from the then government in June 2019 – “Creating a responsible payment culture: a call for evidence on tackling late payment”, that proposed the strengthening of the powers of the Small Business Commissioner “to hold to account the minority of larger businesses who fail to make payments on time”. And then, in February 2023, the last government sought feedback on the effectiveness of rules that require big firms to report data on how quickly they pay suppliers as part of its wider review of the impact of late payment on small businesses.
It seems that nothing has changed. And that leaves SMEs with a few options – according to the FSB.
Where customers consistently pay their debts late, firms should evaluate whether they want to continue offering credit terms or even whether they want to supply at all – there’s precious little point in being a busy fool. As the maths demonstrates, selling something on, for example, a net profit margin of 5%, means that to recover a bad debt of £1000 will require additional sales of £20,000.
Sellers should consider setting up good cashflow forecasting to see if extra financing will smooth the pain of late payment. Granted, it comes with cost, but it’s arguable that 95% of something (assuming the bill is eventually paid) is better than 100% of nothing.
Then there’s the option of getting more formal in chasing down outstanding debts, notifying the customer of the right to add statutory interest, and taking further action – debt recovery or court procedure – to recover monies due.
The accompanying press release to the government’s news of further action reads like a bit of a ‘schmooze-fest’ with comments such as “announcing this programme of work today is a huge confidence boost for the small business community and a clear signal the new government intends to stand up for small firms” from the FSB, “the government’s new measures are all positive and show a strong commitment to addressing this issue” from Sage, and “it’s encouraging to see these new late payment measures being announced.” from campaign group Good Business Pays.
No doubt there will be another announcement of action in this sphere at some point soon, but don’t hold your breath.