Late payment problems ‘haven’t gone away’

A government advisor on prompt payments has told the BBC that late payment problems worsened immediately following the onset of the recession and that the issue “hasn’t gone away” in the decade since.

Speaking to the BBC Radio 5 live Daily show, hosted by Adrian Chiles and business expert Colletta Smith, Arnab Dutt said that late payment problems are a “perennial issue”, although he noted that the EU Late Payments Directive has had some impact over the past four years.

Mr Dutt is the founder and CEO of healthtech company Dexo Technologies, and a member of the Cabinet Office advisory panel on small and medium-sized enterprises, which has a particular remit to address late payment problems and possible long-term solutions the government could put into effect.

He told the BBC on April 11th: “Every small business has experienced late payment problems. It was especially exacerbated after 2008 and the European Commission Late Payments Directive that came into force in 2013 has certainly improved matters.

“I think that’s because it’s highlighted the bad practice of late payments which has strangled and affected small businesses and continues to – it’s a perennial issue, it hasn’t gone away, but it is being tackled.”

He also recognised the dilemma many small businesses face when their largest invoices go unpaid, as while the sums of money might be significant for a small firm to go without for any length of time beyond the payment deadline, the contract overall is equally likely to be significant to the firm’s long-term cash flow.

What to do about late payment problems?

This raises the question of what action to take, and whether or not to start small claims court action against a customer who, although they may pay significantly late on each invoice, is worth a large proportion of your income overall.

Mr Dutt said: “One has to have a judgment as to whether: do you alienate your largest customers by going through that process? There are other ways that this can be done – one could be through whistleblowing – but I think the most important change will be led by government, and pushing forward that late payment is culturally immoral.

“It’s the wrong thing to do, it harms the economy, as well as harming our small businesses. I think that’s the message that really has to come across, as well as enforcing the Late Payment Directive and ensuring with government contracts that there are sanctions.

“So, when companies who have government contracts – the government spends nearly £400-500 billion in public sector procurement – we can enforce sanctions against those companies who don’t pay their supply chain on time.”

What are the alternatives to small claims court?

Of course this still leaves the problem for small businesses of how to pursue large customers for overdue invoices, and getting the help of a debt recovery agency is a good starting point as a precursor to small claims court action.

In many cases, a strongly worded letter to the customer’s accounts department will be enough to push them into paying the full amount on an overdue invoice: no reasonable member of their accounts team will want to incur interest and penalty fees on a bill that could have been paid on time.

Any large firm will have invoices coming in and money going out all the time, and it is common practice to push payment back as long as possible, which means if you do send a letter warning against debt recovery action, it is quite likely that you will not be the only one to do so.

Taking action in this way will usually get your invoice moved to the top of the pile – or into a priority pile of those suppliers who are prepared to take action to get paid what they are rightfully owed – while the small firms who do not act go into the secondary stack to be paid whenever the accounts team decide to do so.

It would be relatively unusual for a large company to cut off a supplier simply for asking about an overdue payment, although this might change if you were to launch actual court action against the company.

Overall, combined with the risk to your cash flow from late payment on a large contract, it usually makes the best business sense to issue a letter of warning via a debt recovery agency as a reminder that payment is due, which still leaves the option of small claims court action open to you at a later date if it becomes necessary.