Firms Urged to Impose Penalties for Late Payments
by EasyEditor Newswire
Contracts between firms which include late payment clauses need to become a common feature of everyday business practice, claim legal experts ahead of an EU update of a directive aimed at tackling business failures.
On average, the majority of small and medium firms have to wait at least
41 days longer than the time scale for payment agreed with customers before they get their money.
The latest research from Bacs Payment Schemes found that in the current economic climate at least 37 per cent of late payers take up to three months to settle invoices, leaving small and medium enterprises (SMEs) out of pocket to the tune of over £24billion at any one time.
According to the Law Society the growing trend means businesses will have to include late payment clauses in contracts as standard if the number of firms going out of business due to cash flow difficulties is to be reduced.
“Average commercial debts caused by late payments are high in the UK, and for SMEs a lack of cash flow can be crippling. With credit less available to those businesses from banks, late payments have a far more serious consequence for SMEs,” said Robert Heslett, President of the Law Society in England and Wales.
“Considering the amount of red tape SMEs and start-ups are faced with, it is no surprise that seeking protection against late payment from customers does not come top of the to-do list. However, it could be the difference between the business surviving or not, especially in the uncertain economic climate.”
As the imminent increase in VAT to 20 per cent is expected to add to SME cash flow problems legal and business experts claim firms must take advantage of the protections already available to help them safeguard against late payments.
“Carefully worded terms and conditions can set out in clear terms how and when payments should be made with penalty clauses if a deadline is missed,” said David Reilly, commercial director of Create Ts and Cs, which specialises in tailor made terms and conditions for SMEs.
“Ts and Cs do not need to be complicated as they are intended to simply represent the formality of a business relationship.
“Properly prepared terms act as an effective deterrent for late payment and, should there be a dispute, can help solve a problem without the need for drawn-out legal action. However, if a firm needs to go to court to recover a debt it is more likely to succeed if it can be shown the debtor is in breach of an unambiguous agreement.”
The European Union is currently looking at updating a directive aimed at tackling late payments, such is the impact on the SME sector across Europe as a whole, but any resulting legislation is likely to take some time before it comes into force.
According to the Federation of Small Businesses, which represents more than 213,000 members across the UK, many government departments and agencies are still paying late despite making commitments at the start of the recession to settle invoices within 10 days.
A survey of SME cash flow found that on average 34 per cent of payments from the private sector are late compared to 31 per cent of UK central Government receipts, 30 per cent of those from Government agencies, 30 per cent from EU institutions, 29 per cent of NHS money and
25 per cent of local authority payments.