By Daniel Hunter
Compulsory daily interest charges should be made law to punish businesses that pay late, unless they ‘opt-out’ and risk public criticism, according to leading commercial debt recovery firm Debt Guard Solicitors, part of Irwin Mitchell.
Analysis of government Companies House records by the firm revealed that 4,192 micro- businesses, defined as having less than 10 staff, on average each fell into £68,000 of trade debt in the last financial year. These firms also typically waited 63 days for payment, more than double the standard payment terms.
Mark Burgess, Debt Guard’s chief operating officer, said: “To combat what is an entrenched late payment culture damaging SMEs cash flow, tougher legislative action is required. For instance, the existing statutory right to charge late payment interest does not go far enough and should be replaced by a more robust ‘opt-out’ system instead. The risk of an enforced legislative financial penalty would help ensure that contracted payment terms are adhered to by big companies rather than undermined.”
The Small Business, Enterprise & Employment Bill, which includes clauses on tackling late payment, is currently on its passage through Parliament. However, a proposed amendment to introduce daily late payment interest at 8% above the base rate has been rejected by MPs.
Burgess added: “We would like the House of Lords to put forward an amendment in support of an ‘opt-out’ system on late payment daily interest charges for the House of Commons to consider. For those companies that do opt-out, they should be publically named to dissuade others from following suit.”
According to leading trade bodies, the culture of late payment is worsening. Research by the Institute of Directors (IoD) revealed two-thirds of SMEs suffer from the problem, and the Federation for Small Businesses (FSB) has stated one in five small firms are financially bullied by bigger clients.
This is despite Government attempts to address the crisis, such as through the Prompt Payment Code, which seeks to encourage large businesses to set out clearly defined payment terms. However, due to the voluntary nature of the code, only 1,700 UK’s businesses have signed up to its principles.
The EU Directive on Late Payment, calling for a maximum payment timeframe of 60 days, has also been largely ineffective, Burgess said. This is due to a loophole that allows for longer payment terms if agreed with the supplier. Last year, this led to food giant Mars doubling its payment terms from 60 to 100 days, with suppliers given little choice but to accept or risk loss of business.
According to the Federation for Small Business (FSB), 5% of small businesses have also been asked to make some form of payment to avoid being ejected from preferred lists of suppliers. The ‘Pay and Stay’ policy of Premier Foods, which involved requesting suppliers pay up to £5,000, was recently widely criticised.
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