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Helping hand from Europe on payment performance

by
01 May 2013, at 12:00am

SIMON MARKS discusses whether the impact of late payment can be minimised by statutory intervention or is slow payment an inevitable burden that has to be accepted?

ARGUABLY, many veterinary practices could do a lot more to look after the financial health of their businesses and all too often long-term debt is allowed to sit on balance sheets for fear of upsetting customers or getting involved in an adversarial and potentially expensive formal recovery process.

All business owners and credit controllers will champion a “cash is king” business ethos and a regular flow of cash is essential to the smooth running of a business. The unfortunate reality, however, is that many practices do not have reserves or a generous overdraft facility to allow them to wait for payment of what they are owed without impacting serious damage on their bottom line.

However robust their credit control system is, many businesses are not resilient enough to ride the storm of protracted payment delays from multiple debtors and, to put it bluntly, it doesn’t matter what reason a customer gives you for not paying you on time, late payment can (and very often does) put a business into insolvency.

The statistics on late payment are frightening:

  • 861,000 firms – that’s half of all UK SMEs – experienced late payments in 2011;
  • poor payment practice costs UK businesses £20 billion every year;
  • late payments to small businesses reached an all-time high of £33.6 billion in 2011;
  • small firms are each owed an average of £39,000 at any one time;
  • 1 in 4 businesses go insolvent due to invoices being paid late;
  • 158 million man hours were lost to chasing overdue bills last year.

The statistics are slightly historic but you’ll surely agree that the magnitude of the figures is absolutely staggering. The 2012 Late Payment Index from Experian suggests that there may have been a recent slight improvement in the late payment culture.

I’m not suggesting seismic changes or the return of some smiling faces in the credit control departments (and there will always be hardened “professional” debtors dodging their responsibilities), but due to a bit of a recent nudge and helping hand from our law makers in Brussels, a sense of optimism might just be around the corner…

So what’s changed?

The Late Payment of Commercial Debts Regulations 2013 came into force on 16th March 2013 and implements an earlier European Directive, helping combat the problem of late payment in commercial transactions.

The new regulations add some extra weight to the provisions of the Late Payment of Commercial Debts (Interest) Act 1998, a fairly wellknown mechanism for obtaining preferential interest where business debts are paid late, the applicable rate being 8% over bank base rate and “late” being defined as 30 days from the date of the unpaid invoice.

When dealing with euro area countries, creditors are entitled to a statutory rate of at least 7% over the European Central Bank Rate.

The new regulations re-affirm the late payment interest entitlement and also remind us that, in addition to interest, businesses are entitled to charge a late payment “compensation” fee ranging between £40 and £100 depending on the value of the individual invoice.

In my experience, however, business owners and managers have sometimes been reluctant to apply these penalties to the outstanding account balance for fear of upsetting a long standing client/customer relationship and have just breathed a sigh of relief when the principal debt was paid at long last.

Unfortunately, this rather relaxed (and understandably pragmatic) approach to the strict application of these late payment fees and interest is just adding to the problem and unless business owners start showing some courage when faced with the threat from the late paying client that “they will take their business elsewhere”, the issue is not going to go away and the dreadful reputation that we have in the UK for delaying payment is going to continue.

There are recent strong signals from the government to all public institutions directing their purchase ledger departments to sign off invoices and pay their suppliers on time but if we are going to change the culture of late payment in the UK, business owners need to start applying interest charges and late payment penalty fees consistently.

Unless debtors start to understand that they can’t shop around with their various suppliers for extended interest free “loans” (and that’s what we’re really talking about here aren’t we?), businesses are going to continue to fall foul of the professional debtor.

Importantly, the 2013 regulations have introduced an additional incentive for previously savvy debtors to settle accounts within the agreed credit period and that is the implementation of the creditors’ entitlement to recover their “reasonable costs in attempting to recover the debt and any unreasonable attempt to exclude recovery of those costs will be of no effect”.

This is an important change and it should mean that any business employing a lawyer or debt recovery agency will be able to add on the third-party charges to the debtor’s account balance and attempt to recover the principal debt, interest and in practical terms, all of their “prelegal” costs.

So there’s really no longer any financial reason why stubborn debts cannot be outsourced to a specialist law firm or agency when the efforts of the credit control team within a veterinary practice have been exhausted.

It’s too soon to assess the impact that this new piece of statutory regulation will have on the cashflow of small and medium sized businesses but the government and our European “masters” deserve some recognition for their courage and efforts in trying to address the inherent late payment culture suffered in the UK for the past 100 years or so.

Perhaps we are beginning to see a slight change in the way that traditionally slow payers take responsibility for their actions.