Late payment on the agenda

23 October 2020

The Government’s recently-announced consultation, “Increasing the scope and powers of the Small Business Commissioner”, is seeking responses on how the powers of the Small Business Commissioner can be expanded in order to deal more effectively with late payment.

The consultation is seeking views on:

• How to improve enforcement against companies which do not comply with requests for information about their payment practices
• Whether sanctions should be imposed by the Small Business Commissioner against companies which have been found to have “poor or unfair payment practices towards small businesses”
• Whether the Small Business Commissioner’s powers should encompass complaints by small businesses about other small businesses
• If the Small Business Commissioner should have the power to investigate “specific instances of suspected poor or unfair payment practices”, whether on their own initiative or following complaints from a third party, and
• If the Small Business Commissioner should be granted the power to carry out a review into “the effect of relevant legislation, policies and practices on small businesses”, including but not limited to issues around late payment.

Late payment and insolvency

Late payment is a recurring, chronic problem for many UK companies, especially SMEs, and often plays a role in corporate insolvencies. Any interruption to cashflow can cause serious financial distress, and not receiving payments within agreed terms can sadly often prove fatal for a company, especially if it is reliant on one or a handful of customers. R3’s survey of its members from 2016 found that late payment for goods or services was “a primary or major cause of 23% of insolvencies in the last twelve months”, with the construction industry identified by 57% of insolvency practitioner respondents as the sector with the worst track record for late payment, in line with findings from a previous member survey in 2014 (59%).

COVID-19 may have made the situation worse: A report by the Federation of Small Businesses in June found that the pandemic had intensified the issue for many companies, with 62% of small businesses “subject to late or frozen payments in the wake of the COVID-19 outbreak”.

The Small Business Commissioner’s office already plays an important role in highlighting and tackling late payment, and is a strong advocate against the practice. However, given the relationships involved between suppliers and customers, there are strong disincentives for small businesses to ‘name and shame’ customers with poor payment practices in public, as the customer may simply decide to terminate the contract. This has somewhat hampered the Small Business Commissioner’s ability to act freely and to impose sanctions on many poor performers. If the Commissioner is given freer rein as a result of the consultation, that could lead to a step change in the way this issue is addressed by UK plc.

Advice for businesses

When a company supplies goods or services to another business, it is in effect extending credit to the customer until payment is received. As in other areas of business, the principle of ‘know your customer’ is key. Checking the customer’s credit rating is a necessity, as is monitoring it over the duration of the contract; even long-standing customers can encounter financial difficulties which can affect their ability to pay, which can cause knock-on troubles for their suppliers. The changes which the recently concluded Companies House consultation ought to usher in should make it easier for suppliers to find out more about their customers, and to identify and avoid potential fraud. Contracts to supply physical items should include an effective and legally watertight ‘Retention of Title' clause, to make sure that goods can be retrieved from an insolvent customer if they have not been paid for.

Sometimes, unfortunately, cashflow interruptions due to late payment are unavoidable; if delays to payments are causing a company to find it hard to pay its own outgoings when due, qualified and professional advice from a reputable and regulated expert should be sought.