Debt recovery and other protections can help with cash flow, writes PADDY O’DONNELL
Cash flow is key, debt is bad. This is a mantra that all businesses put at the forefront of their operations. A positive cash flow is crucial to the success of any business, by allowing businesses to cover their day-to-day operations, boost their credit rating and facilitate growth by attracting investors. Increasing bad debt levels put a strain on cash flow, impacting the daily functioning of a business.
Having high levels of bad debt can result in funds not being available to carry out crucial operations, affecting the profit and potential future growth of the business, or in some cases risking total financial instability.
Unfortunately, in the post-Brexit and post-Covid economy, late payment has become an ever-increasing problem for UK businesses across all sectors. The UK Government has recently announced that late payment costs the economy almost £11 billion per year, affecting over 1.5 million businesses and resulting in an average of 38 UK businesses closing every.
These troubling statistics emphasise the scale of the bad debt crisis and stress the importance of businesses managing their bad debt levels, or they risk stunted growth, reduced productivity and profits and, ultimately, insolvency.
Fortunately, all hope is not yet lost in tackling the nation’s bad debt crisis. Key legislation exists which seeks to prevent late payment and compensate creditors, and the UK Government is currently in the process of introducing legislative reforms intended to give further protections to businesses against late payment and create the ‘strongest legal framework on late payments in the G7’.
Existing protections for businesses
The Late Payment of Commercial Debts (Interest) Act 1998 provides businesses with particularly useful tools. Under this, businesses are entitled to charge interest on unpaid invoices 30 days after they fall due.
The generous rate of interest of 8% over the Bank of England Base Rate allows businesses to be compensated for the cash flow disadvantage they may have suffered from the late payment. Furthermore, businesses can claim fixed compensation sums per overdue invoice: £40 for debts under £1,000, £70 for debts between £1,000-£10,000 and £100 for debts over £10,000. Finally, businesses are entitled to recover reasonable costs that they may incur in the course of recovering the debt.
While strong safeguards clearly do exist to help protect businesses from and compensate them for late payment, the sobering statistics on bad debt in the UK make plain that something really isn’t working.
Businesses may not be aware of their entitlements under the Act or are reluctant to enforce their rights for fear of breaking down client relationships.
However, often those businesses who demonstrate that they’re using the safeguards of the 1998 Act will find that they will have fewer late payments as clients will not want to incur interest and compensation liabilities.
This can be crucial in today’s economy, where increasing late payment can be detrimental to a business’s continued survival.
Despite these protections, much more needs to be done to help tackle the scourge of late payment.
What changes are in the pipeline?
Recent late payment proposals have been introduced to reduce trade barriers, reform business rates and encourage more SMEs to trade. These aim to focus on several key areas, including strengthening the role of audit committees and board-level scrutiny regarding large company payment practices, establishing maximum payment terms and setting deadlines for disputing invoices.
In addition, the proposals mandate statutory interest on overdue payments, enhance reporting on statutory interest and impose financial penalties on companies with a history of persistent late payments. The Small Business Commissioner (SBC) would also be granted additional powers, including oversight of report dates, while the use of retention clauses in construction contracts would be more tightly regulated.
The primary goal behind these proposals is to ensure that businesses maintain healthy cash flow, which is crucial for their survival and growth. By improving business-to-business payment practices, the government aims to reduce late payments and ensure businesses are paid fairly and on time.
How to protect your business
To safeguard your business, it’s important to adopt certain practices. These include setting clear credit policies, issuing invoices promptly and accurately, offering early payment incentives, keeping detailed records of transactions and communications and knowing when to escalate issues and seek help from debt recovery specialists.
Paddy O’Donnell is a dispute resolution solicitor at Aberdein Considine LLP
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