The IoD’s Information and Advisory Service (IAS) explains your options for chasing up sluggish debtors and protecting your company’s cash flow
The scourge of late payments puts 50,000 small firms out of business each year in the UK, costing the economy an estimated £2.5bn. Indeed, such is the scale of the problem that Previse, a start-up aiming to end a culture in which many large companies feel free to string along their smaller creditors, has recruited two FTSE 100 chairmen to its advisory board: Sainsbury’s David Tyler and British Land’s John Gildersleeve. So what action can you take if slow payers are starving your firm of cash? The IoD’s Information and Advisory Service (IAS) offers the following guidance.
When can a payment officially be considered late?
The countdown starts on the day the customer receives the goods/services and invoice – or, if the invoice has been issued in advance, when the goods/services are provided. Under the Late Payment of Commercial Debts (Interest) Act 1998, which covers enterprises of all sizes, a business has 60 days to settle the account before its payment is treated as late, unless otherwise expressly – and fairly – agreed. The threshold for a public-sector debtor is 30 days.
What can I do about it?
First, it’s important to find out why the customer isn’t paying, particularly if you wish to retain their business. If there’s a dispute about the goods/services you’ve provided, this should be resolved as quickly as possible. Otherwise, the debt will become harder to recover.
If the customer seems to be having cash flow problems of their own, try to agree an instalment plan, but be sure to confirm this in writing.
If the customer has no good reason, you have three options: engage debt collectors; issue a statutory demand (a written warning that you may litigate if the debt is not settled or no acceptable alternative solution is reached); or, for debts under £10,000, go to court using the small-claims track.
Can I charge interest?
By law, you can charge the statutory interest rate on a late payment: eight per cent a year plus the Bank of England’s base rate for business-to-business transactions. The base rate is 0.5 per cent at the time of writing, so the statutory interest charge for an overdue debt is 8.5 per cent a year.
In addition to recovering interest, you are entitled to charge a fixed sum for recovering the debt. This is £40 per invoice for debts of up to £999.99; £70 per invoice for debts of between £1,000 and £9,999.99; and £100 for debts of £10,000 or more.
How can I limit the risk of late payments in future?
The best way to mitigate the risk of late payments is to agree with each customer in advance the terms of the transaction and to submit accurate invoices in good time. Businesses that have signed up to the Prompt Payment Code have committed to paying suppliers according to clearly defined terms and ensuring that there are systems in place for dealing with complaints and disputes.
It’s also possible to protect your business against the risk of debtor insolvency by taking out credit insurance. You have the option of insuring all or part of your firm’s turnover and you may be able to cover selected accounts, although the insurer will usually require you to carry at least 10 per cent of the risk yourself.
How the IAS can help you
The Business Information Service (BIS) is accessible by email (firstname.lastname@example.org) or phone:
020 7451 3100
The Directors’ Advisory Service (DAS) can give guidance by appointment, either face to face at 116 Pall Mall or over the phone:
020 7451 3188
The legal helpline can answer quick queries about a vast range of issues:
0870 241 3478*
The tax helpline can give callers advice on both commercial and personal tax matters:
IoD members are entitled to 25 enquiries a year to the BIS; four sessions with a DAS adviser; and 25 calls to both the legal and tax helplines. For further details, visit iod.com/information or email email@example.com
* Quote your membership number
† Quote your membership number and reference number 33337