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How To Deal with Late Commercial Payments for SMEs

Here in the UK, we’re a nation of small business owners, indeed more than 99% of all companies here are SMEs and these account for 60% of all private sector employment.  This means that SMEs represent the backbone of our nation’s economy and are one of Britain’s most important financial assets.  However, anybody who’s ever owned and managed a small business will know that it’s not an easy undertaking, there are all sort of challenges to be dealt with and one of the major challenges faced by small companies is the cash flow problem. 

According the research, 50% of small businesses fail within the first few years and most small business owners blame this on several factors.  Apparently the biggest growth barrier in the opinion of 44% of SMEs is the UK tax system.  This is followed by a lack of bank lending and too much tape, closely followed by costs and late payments or cash flow.  Despite a recent improvement in economic conditions here in the UK, small business survival rates are still lower than they were before the financial crisis began. 

Dealing with late payers is essential to keep cash flow steady and ensure that lack of cash does not cause your business to go under.  Did you know that you can actually claim interest on late payments for goods or services?  If you and your customer haven’t already agreed on a payment date then, according the British law, the payment is late after 30 days for public authorities (if you deal with them) and business transactions 30 days after the customer receives the invoice or you deliver the goods or service (if this is later than the invoice).  Although it’s possible to negotiate a longer period for payment from one business to another, if it’s longer than 60 days it must be fair to both businesses.

When it comes to charging interest on late commercial payments, the “statutory” interest rate is 8% plus the Bank of England base rate (which is currently 0.5%) for business to business transactions.  However, if there is a different rate of interest in the contract you can’t claim the statutory interest.  If you do decide to add interest to the money you’re owed, then you’ll need to send a new invoice with the interest added to the total.

You can also charge a business a fixed sum for the cost of recovering a late commercial payment as well as claiming interest.  The amount you can charge is governed by late payment legislation and depends on the amount of the debt:

Amount of Debt

The Amount to Charge

Up to £999.99

£40

£1,000 - £9,999.99

£70

£10,000 and over

£100

 

As a supplier you can also claim for reasonable costs in recovering the debt, whether you’re using extra administrative resources in order to do so or whether you’re using the services of a professional commercial debt collecting agency.