In a recent survey published by the Federation of Small Businesses, over 50% of small businesses reported late payment of their invoices within the last three months of 2022, and 25% of businesses reported an increase in late payment over the same three months.
Prompt payment of invoices issued by small businesses is not only key to that small company being able to survive (as it affects cashflow and the ability to pay staff, HMRC, and other suppliers, etc), but late payment prevents small businesses from obtaining credit themselves and potentially expanding.
In 2020, there were 5.9 million small businesses in the UK, but in the last two years, this figure has reduced by around 400,000. Whilst some of these business closures will be due to the Covid-19 pandemic, a large number of closures will be due to poor payment practices by third parties, forcing smaller companies to have to cease trading.
Small businesses who contract with larger organisations are most vulnerable, as it is often the larger companies who use their ‘weight’ in the contractual relationship with the smaller company and do not pay in accordance with any agreed payment terms. Similarly, when negotiating payment terms, larger companies may use this as a reason to insist on later payment terms, as they know the smaller company needs the relationship more than them.
Small businesses may not wish to upset their larger supplier, as they do not want to lose that business relationship, but the late payment of the small company’s invoices means they cannot often pay their own staff or third parties, leading them, not the larger company, to go out of business.
Although a large number of companies have signed up to the Prompt Payment Code, whereby they commit to paying 95% of their invoices within 30 days, many do not follow this practice and there is currently no real penalty against them.
Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can claim both interest and compensation for every invoice that is paid late. If you have a large number of invoices that have been paid late (or remain unpaid), then compensation and interest can soon mount up and act as a deterrent for the supplier to pay you late again. However, if you are still in a business relationship with that supplier, you may not want to pursue such a claim under the Act, as it is likely to sour the relationship. As such, you need to consider if you want to continue your relationship with the supplier before deciding to pursue them. If the relationship has already ended, there is nothing stopping a business from pursuing a claim for historic late-paid invoices from the previous six years.
Late payment is not confined to any particular sector, with over 60% of the education, construction, and manufacturing sectors all experiencing examples of late payment within 2022.
The Federation of Small Businesses have made several recommendations in their report as to how to combat the problem of late payment, requesting the government to send a strong signal to businesses that the present situation will not be tolerated. If the issue continues, we should expect to see a change in the legislation to allow small businesses to be paid sooner. The problem exists, however, of whether small businesses will seek to impose the new legislation on their larger suppliers, through fear of losing that business relationship.
Before contracting with a larger business, smaller businesses should consider the payment terms and whether they would be able to survive if those payment terms are not adhered to, by their larger supplier. It might be sensible to speak to other small businesses who contract with the larger company first, to see if they adhere to payment terms or are regularly late in paying invoices.