Failing to receive payment on time can be a real issue for any business as it affects cash flow, business development and the general growth of the company in question.
Whilst this issue hits small and medium sized businesses hard, it can also cause wide spread problems for larger companies as evidenced by the collapse of Carillion.
The Late Payment of Commercial debts (Interest) Act 1998 (as amended) has given businesses assistance when addressing late payment in commercial circumstances, by entitling creditors the right to claim interest, plus a fixed sum and their reasonable costs of recovering a debt. This is in the absence of terms and conditions specifying otherwise.
The key points creditors should be aware they are entitled to are:
1. Statutory interest of at least 8% above the Bank of England base rate;
2. In the absence of other provisions this entitlement runs from 30 days after the payment is due;
3. A fixed sum, determined on a pro rata basis, depending on the size of the debt; and
4. Reimbursement of the reasonable costs of recovering the debt, less the fixed sum.
With the entitlement of being able to claim the ‘reasonable costs’ of recovering the debt, creditors can take action to recover monies owed at no cost to themselves ultimately. However, research indicates there appears to be a lack of uptake on claiming these additional sums from businesses either through a lack of knowledge about their entitlement or because of a reluctance to utilise this legislation through fear of losing future business with the other contracting party and damaging the relationship.
The European Commission issued a report in August 2016 concluding that while the Late Payment legislation has its place, additional ancillary remedies were also required. It recommended the reporting and publishing of statistics on payment periods and encouraged initiatives such as prompt payment codes, mediation and incentives for timely payment.
Further assistance for small and medium sized businesses has been brought in through The Late Payment of Commercial Debts (Amendment) Regulations 2018 which are coming into force on 26 February 2018. This entitles representative bodies to contest unfair contract terms and practices in scenarios where The Late Payment of Commercial debts (Interest) Act 1998 (as amended) are applicable.
Advice for businesses is to keep on top of their outstanding debts and to act quickly when payment is not forthcoming, keeping the lines of communication open as much as possible. Ensure internal procedures are in place and are stuck to when chasing for monies owed and deal with disputes promptly. Claiming interest and costs on top of what is owed can be used as a great incentive to encourage payment on time.