Legal action is a big step to take when recovering overdue invoices.

While it is often effective, lawyers are expensive and there is no guarantee of recovering the debt or the fee.

Fortunately there are other options.

 

Research published by the Federation of Small Businesses (FSB) in November 2016 shows that the average amount for an overdue invoice is £6,142.

David Walker from Cashflow Rescue points out in his book that for amounts below £10k the legal system prevents your solicitor’s fees from being recovered EVEN if the case is won.

As the amount of the debt decreases the cost of legal fees as a proportion of the outstanding debt goes up. If the legal fees can’t be recovered then the consideration process shifts away from legal action and possibly towards writing off the debt.

There is an obvious problem, with the average size of an overdue invoice being £6,142 many businesses will feel that legal action is not worth the cost. This is perhaps why so many businesses eventually go to the wall.

In the same research the FSB point out that were it not for late payment an additional 50,000 businesses might have been saved from having to close their doors permanently.

Leaving aside invoice financing as a means to freeing up capital there are several other low cost actions that suppliers can take to recover debts and mitigate the problem. They broadly fall under two headings:

  1. Initiate D.I.Y legal proceedings
  2. Carry out effective due diligence in advance of going agreeing a contract.

 

Initiating legal proceedings on your own

You will need to consider this in context of the size of the outstanding debt and whether or not it’s disputed or undisputed. However, it isn’t as daunting as it sounds mainly because there are a few actions that can be taken which generally lead to a favourable outcome before the situation ever goes to court.

 

Option 1

Probably the first option to consider is the issue of a letter before action . Users that register with Prompt Payment Directory can obtain a free LBA template, supplied by Lovetts Solicitors, in the My Resources section of the account area.

A letter before action is a letter warning your customer that court proceedings will be started if the debt is not paid. Going to court should always be considered a last resort and the court will expect that all efforts be exhausted before issuing a legal claim.

A letter before action is that final opportunity for a debt to be settled by the debtor, however it’s also a bit more. In most cases debtors will understand the gravity of the situation and find a way to pay up upon receipt of one.

 

Option 2

Another option is the issuing of a statutory demand. More information on how to do this can be found via Cashflow Rescue. However, in essence a statutory demand is the beginning of the formal legal process for recovering a debt.

Probably the most important role it plays is to signify to the debtor that you are serious about recovering the money owed to you. Links to the various forms can be found here.

 

Option 3

A more heavy handed option is to issue a draft winding up petition.

A winding up order is a court order that forces a company into liquidation. These are issued by the courts when all other efforts have failed and a creditor has presented a winding up petition to a court with the intention of obtaining a winding up order as a means to retrieve funds from the overdue invoice.

A draft winding up petition signifies intent but does not require involvement from the courts and as such costs less. Lovetts report that in cases they represent, 4 out of 5 debts are paid when draft winding up petitions have been issued to the debtor.

 

Option 4

The final option is to follow the procedure set out by Cashflow Rescue.

This low cost, easy to use, self administered service was created specifically to help creditors with individual outstanding debts of less than £10,000 recover those debts, through the courts if necessary, without the costs of legal fees.

The process can also be used in cases where the overdue invoices amount to more than £10k and anecdotal evidence shows it to be a very effective process.

The clearly laid out framework puts the creditor in control of the debt recovery process and the associated costs. For adaptable small businesses owners that are used to wearing many hats this should not prove too daunting.

 

Effective due diligence

Ultimately it’s preferable to simply not be in the position where invoices are overdue. The best advice here is to get to know your customer as much as possible in advance of doing business.

Additionally, just as with the principle behind Cashflow Rescue, suppliers can begin to make a difference and join the growing number of contributors by anonymously sharing their experiences of payment, both good and bad, on the Prompt Payment Directory. In doing so there are four benefits:

  1. All contributors making their first rating will receive 12 months FREE subscription to The Prompt Payment Directory
  2. Subscribers to The Prompt Payment Directory can search for potential or existing customers to see if they have been rated and if so what their score is. Where companies have been rated and payment was overdue, some context may also be available in the form of an explanation given by the debtor as to why the invoice has not been paid or was paid beyond terms. This will help potential suppliers to more effectively understand the risk level and compensate for it.
  3. Subscribers to The Prompt Payment Directory will also receive access to free resources in the user’s account area, these will help in debt recovery as well as debt mitigation.
  4. Contributors to The Prompt Payment Directory will be taking a positive step towards creating a business environment that espouses transparency and promotes prompt payment.

 

ACKNOWLEDGEMENT: With thanks to David Walker of Cashflow Rescue for his feedback on the writing of this post.

This is the first in a two part post explaining why the solution to the issue of late payment in the UK is not just a technical one.

An industry is steadily growing up to help suppliers in the UK navigate the issues related to late payment of commercial debts.

The current batch of tools and services available to suppliers to help tackle the problem can be divided into two categories, those that deal with the issue before it arises and those that deal with it after it has arisen.

Before

  • Credit reference agencies
  • e-invoicing solutions

After

  • Debt collection agencies
  • Invoice factoring
  • Invoice financing
  • ‘Going legal’

 

The data speaks for itself

BACS debt data

Source: BACS

The data above from BACS shows that the issue of late payment isn’t abating. While it fluctuates it has yet to show a sustained drop and even if it does, £30bn is a long way to go down.

Added to which the BACS data is a conservative estimate with ABFA indicating the figure could be as high as £67bn and Zurich suggesting as high as £255bn. Indeed the ABFA figures show a steady increase since 2011 with no sign of the issue easing.

The data therefore shows that in spite of all the current tools and services on offer for suppliers to use the impact has yet to be meaningful.

 

Everybody keeps talking about a shift in mindset…

Most people now agree that what is really needed is a significant change in mindset. However, while some think this change needs to come from the customer / large organisation, TLPD believes that in addition it also needs to come from the supplier.

An example of this is highlighted by an anecdote we recently learned of in which a supplier providing goods to a major, retailer submitted an invoice and was only paid part of it. Upon enquiring the retailer explained that they had run a BOGOF on the supplier’s product and that the terms of the contract (which both parties agreed to) stated that such offers would be paid for by the supplier. This resulted is what might loosely be defined under the heading of late or non payment but in fact, while arguably a borderline ethical practice, it was entirely legitimate.

The reason why the supplier was caught out by this was because they had not adequately read the terms of their contract. This is not necessarily the fault of the customer.

As such the change in supplier mindset we are talking about here relates to suppliers accepting a greater level of responsibility and taking more control over their cashflow.

Update: Part two of this post can be read here.

If only the Goverment’s right hand knew what it’s left hand was doing…

This article by Tax-News.com highlights a shocking cycle of events whereby some SMEs that are paid late by their suppliers could end up with the bitter double whammy of additionally being fined by HMRC as a direct consequence.

HMRC is under pressure to generate more revenue, no doubt as part of the government’s drive to cut the deficit, and while large organisations with battalions of tax lawyers who are able to run rings around the overworked HMRC staffers are able to reduce their tax bills (unethically but legitimately), SMEs with more humble resources are considered a softer target.

In 2014/15 HMRC investigations into the tax affairs of SMEs generated an extra £470m for the govt’s. coffers. Coincidently the tax take from investigations into large businesses fell by £500m between 2013/14 and 2014/15.

Part of the reason why SMEs are flagged to HMRC is because they have cashflow issues that cause them to pay their taxes late. Late payment of a tax bill alerts HMRC which subsequently investigates and fines. It’s an especially tough irony that the late payment of a tax bill might in some instances have been precipitated by invoices that are / were overdue resulting in the cashflow problems that caused the tax bill to be paid late in the first instance.

HMRC also knows that SMEs (suppliers) are a softer target than larger companies (customers) because they don’t have the resource or expertise to defend themselves so effectively in an investigation.

 

So what to do?

There are two actions an SME / supplier can take:

  1. Join the Federation Of Small Businesses.  One of the member benefits of the FSB is something they call Tax Investigation Protection. This is effectively an insurance policy against investigation by HMRC. Should The Revenue come knocking the FSB will go into bat on your behalf, full details are available on the FSB site here. Small businesses can benefit greatly from this.
  2. Small businesses need to do as much as they can to reduce the chances of being paid late in the first instance. This means taking some action.

With regard to this second point, use of credit reference agencies to check the credit worthiness of customers before doing business with them is a good start but even this will only give some basic numbers. By sharing and gaining access to contextualised data related to specific instances of late payment businesses can both contribute to and gather the vital information they need to deflect late payment before it even becomes an issue. But to do this the business community must act together in its common interest and this is where The Late Payment Directory fits in. To find out more, click here.

After all, a rising tide floats all boats.

Prevention is better than cure.

 

In the UK late payment of commercial invoices is a lot like an iceberg, it’s a massive and very dangerous problem but one that is mainly hidden from view.

Sectors which are particularly badly affected by it are construction and retail although they are by no means the only ones.

Just as icebergs can be fatal to ships the issue of late payment of commercial invoices is also very bad for British business and in some cases can also be fatal to suppliers that are owed money.

For those that don’t go under, late payment can still seriously affect their businesses causing owners and managers to change their businesses practices, seek alternative financing (at increased cost), cut investment and make redundancies, to list just a few ramifications. In other words it stunts growth.

The trouble is because it’s an issue that goes largely unreported the waters are comparatively uncharted. Even the extent of the issue varies depending on the research; BACS estimate is to be c£32bn, ABFA estimates it to be c£67bn and Zurich put it at £255bn

 

How could something so bad have such a low profile?

Late payment is something that neither suppliers or customers like to talk about. In some cases it may even be that large [debtor] organisations are not fully aware of the issue.

Research by the Institute of Directors indicates that one of the main causes of late payment cited by suppliers is that of overbearing bureaucracy, this does not necessarily point to bad practice on the part of the customer, more that the increasing complexities and regulation surrounding the way we do business results in ever more complex business processes.

However, suppliers don’t like to talk openly about instances of late payment for fear of tainting business relationships. To do so might be seen as finger pointing by customers and a deliberate attempt to name and shame.

 

What should be done?

It seems hard to see how government policy or legislation can do much to solve this issue. For example, enforcing mandatory payment terms would not necessarily stem the rising tide of late payment, more likely it would simply increase the number of disputed invoices. A customer cannot be expected to pay an invoice for services or goods that are under dispute; while that may be understandable it would be harder to adjudicate each  and every set of circumstances around any given dispute. The Small Business Commissioner’s office would be swamped (assuming it ever becomes a reality).

Playing the blame game really isn’t in anybody’s best interest either, but it should be possible for suppliers to cast light on their experiences in a controlled environment, this potentially benefits both suppliers and customers. However the process of doing so should be a measured one and not a knee jerk reaction which would be the equivalent of slamming the engines in reverse and steering hard to port.

By sharing non sensitive contextualised data around instances of late payment in a controlled environment (i.e. not freely open to the public are large) it will be possible to draw a more detailed map of the of the problem. This has the potential to help not only suppliers looking to find out more about their customers and the risk of doing business with them, but it can also help proactive customers that may want to protect their reputation by clarifying the reasons under which they have had to pay invoices late.

Ultimately this is an issue in which business will need find to find it’s own solution. There are already many different tactics that suppliers can deploy to cope with the issue of late payment and all of them play a valuable role, but the data shows that the issue is not getting any better.

Prevention is better (and less expensive) than cure and in order to successfully steer a course around the late payment iceberg more information and added context is needed, this in turn will lead to better decision taking before businesses enter into new commercial relationships.

The forthcoming introduction of the national minimum wage should sharpen minds on the issue of late payment.

Last year the government announced a move from the national minimum wage toward a national living wage which will come into effect in 2016, as a result businesses are now having to prepare for significantly higher wage bills, already one of the largest costs that any organisation has to carry.

The FSB, in its quarterly survey on confidence among 1,500 small businesses, noted that there was real concern over growth with the number of businesses expecting to see growth having fallen. Hiring intentions have cooled and investment plans are stalling.

Recent findings from Bibby Financial Services indicates the number of businesses being paid late is on the rise and this presents a real challenge to UK businesses as a whole and small businesses in particular.

It is literally vital that small and mid-sized businesses do all they can to mitigate the possibility of late payment. That the late payment of invoices has a huge impact on cashflow, business growth, jobs and even business survival is well documented, so with the upcoming rise in wage bills the pressures are, unfortunately, going to increase.

Now is the time to prepare. Businesses entering into new customer relationships, and even those in existing ones, need to watch out for the spectre of late payment.

There are many excuses that customers deploy to postpone payment of invoices, some genuine, some not. By watching out for these and asking the right questions before inking a contract suppliers can take the initiative to mitigate the impact of late payment without it necessarily costing money in the form of discounts for prompt or early payment or worse still, legal fees.

In circumstance where new contracts mean hiring new staff that will have to be paid at the national living wage, it makes sense to do as much as possible in advance to ensure that the income will arrive on time. This will help prevent the pain of possible redundancies and all the accompanying difficulties.

change3

It’s time for a change, small and medium sized business must stop being made to feel as though they are the victims of an institutionalised culture of late payment.

There can be no doubt that in sectors such as the Scottish construction industry the blight of late payment is both prolific and negative but it shouldn’t be a situation in which suppliers are powerless onlookers.

By acting as a group and not out of individual self interest is should be possible to tip the balance back towards the supplier.

 

Fresh minds, same old thinking

In 2015 there was a flurry of government initiatives such as the creation of a Minister for Small Business, Industry and Enterprise (@Anna_Soubry), the announcement of the search for a Small Business Commissioner to arbitrate over late payment (and other) disputes, the announcement of an initiative to require large organisations to publish details of late paid invoices and the constant calls for a mandatory standard terms of 30 days settlement of invoices most of which are positive steps towards tackling the problem in a practical way.

Other voices are calling for a culture shift away from late payment as an accepted aspect of doing business to one in which it is seen as bad business practice.

However, in spite of all those largely positive efforts the general focus remains on debtor organisations to see the error of their ways and mend them or, failing that, for them to be forced to comply in some way.

 

Paradigm shift

At The Late Payment Directory we would like to see a fundamental shift away from viewing the debtor as the only starting point for a solution to the problem to one in which suppliers are the also one of the key starting points in a broader solution, and in doing so wrest control of the situation back towards the supplier community.

We would like to see a shift in the mindset of suppliers away from an almost enforced acceptance of late payment as a fact of business life to one in which the business-to-business supplier community takes an active long term role in addressing the problem for their own benefit.

In many areas of life where a problem exists prevention is often considered to be better than cure. Regarding the late payment of  commercial debts, knowing if a potential new customer or even an existing one is likely to start settling invoices late, and crucially the reasons why,  can help suppliers mitigate the problems caused by late payment.

Those problems can sometimes result in nothing less than redundancies or even insolvency, so the stakes are high.

To have to make redundancies or close a business because of a potentially preventable set of circumstances is a bitter pill to swallow for business managers and especially for entrepreneurs. A needless sense of powerlessness can only make it harder but it shouldn’t and doesn’t have to be like this.

 

Fresh minds, fresh thinking

Crowdsourcing is a democratic solution for addressing situations like this and it has already been used to dramatic and positive effect in dozens of other areas of commerce from travel to the workplace and even to policing.

By sharing anonymised experiences of late payment for the benefit of the whole business community there are several good outcomes:

  1. The problem of late payment stops being a one-way reality and becomes a two-way process.
  2. The more anonymised data that the community shares and maintains, the more level the playing field becomes.
  3. By being able to review payment histories and the vital context around them, suppliers can make more informed judgments about the level of risk involved in delivering goods or services to a given business. At the very least it should be easier to more effectively prepare for the possibility of being paid beyond terms and as a result mitigate the effects.
  4. For those businesses where late payment of incoming invoices is an unfortunate consequence of the same occurring to them, greater transparency and context should mean they do not become grouped with businesses where late payment of supplier invoices is more of an institutionalised policy.
  5. The process is ultimately a positive one for all businesses not just suppliers. While suppliers are able to make more informed assessments regarding the risk of doing businesses with customers, greater transparency around context will also help improve understanding and breakdown barriers between suppliers and customers.

Towards the end of 2014 the government carried out a consultation on the issues around late payment, it was published in March 2015. One of the key findings was that the business community wanted greater transparency around the whole issue. At The Late Payment Directory this is exactly what we’re working towards. To learn more, click here.

UK business landscape has a prompt payment / late payment (delete as appropriate) issue.

This subtle linguistic distinction was brought to our attention at TLPD quite recently by a colleague and it’s answer depends on where your place is in the supply chain.

If you’re a customer / debtor then you might prefer to think of the issue as a prompt payment problem. If you’re a supplier and owed money then it is more likely to be a simple issue of late payment.

Both ‘prompt payment’ and ‘late payment’ are phrases used to refer to the ongoing problem relating to money that is owed to suppliers by customers; at the time of writing the latest estimates stood at around £32bn, of which £27bn is owed to small and mid-sized businesses.

 

Prompt or just plain late.

The reference to prompt payment is softer sounding and more aspirational. For example, the Prompt Payment Code is a government based initiative targeting large organisations with the objective of accruing signatories that will then stand by it’s code of ethics, chief among which is the commitment to pay suppliers on time. This is a distinctly positive and admirable position (and good for a reputation). The term prompt payment signals intent.

By contrast late payment is more a statement of fact relating the situation in which suppliers find themselves once work has been done, invoice submitted and terms have expired. While it may sound more negative it’s hard to think how this can be articulated in any other way.

Indeed some late payment issues are not always the fault of the debtor or customer; for example if a suppler submits an invoice but omits to add a purchase order number which may have been supplied by the customer, or omits to provide payment details (slightly less likely), then it will be very hard for a customer to pay an invoice on time.

In the above example the invoice payment will still be overdue or late but the situation will not have a negative foundation in terms of a customer seeking to avoid in order to massage their balance sheet or, worse still, maximise profit.

 

Who cares anyway?

Why is this semantic distinction important? Because both terms are used more generally when referring to the wider issue but in reality they relate to different sides of the same coin.

The important point is that while the situation of late payment often is negative, the terms used to describe it are just that – descriptions.

So when evaluating the risk of doing business with a new customer that has a history of late payment, or where a credit checking signals indicates that they may pay late, this should not be automatically seen as a negative point without first gathering more context.

By the same token not all signatories of the Prompt Payment Code are strict adherents to it.