New regulations introduced to reduce late payment of invoices

Small businesses are due to benefit from new regulations introduced this month that require larger companies to publish information about how long they take to pay their suppliers.  Brian Kirby, Head of Debt Recovery, reviews the regulations here and further explains how small businesses can help reclaim debts if there are payments outstanding.

The new regulations, Reporting on Payment Practices and Performance Regulations 2017, define those businesses which must publish this information as companies and LLPs who exceed two or more criteria.  These criteria are based on the definition of ‘medium-sized’ under the Companies Act 2006, and also include the following:

• an annual turnover of £36million
• a balance sheet total of £18million and
• an average of 250 employees.

“From 6 April 2017, companies meeting these criteria must publish information on a Government website about their payment practices and policies,” explains Brian.  “This will include details such as how they perform against their payment targets and their average time to pay suppliers.  This information must be updated every 6 months.  This transparency will allow smaller businesses to make a decision about whether to engage with that company or will at least allow them to prepare for the amount of time it takes them to make payment.”

Brian continues, “It’s important that businesses check now whether they fit the criteria for the regulations, and if so, make provisions to have the information available.  Businesses should also be aware that under the Late Payment of Commercial Debts (Interest) Act 1998, commercial businesses are expected to pay their supplier invoices within 30 days, unless they have agreed to a longer time limit.  If the business information provided under these new regulations show that the average payment time is longer than this, a review of payment practices will be needed to made.”

Late repayment of invoices

In the situation that a company is struggling to get payment from an invoice within the 30 day time limit, there are steps they can take; one of those being a letter before action (LBA).  These regulations come as new research from fintech company, Ormsby Street, demonstrates that a LBA sent from a solicitor makes a difference in the speed of payment.  

The Ormsby Street research was conducted through a survey of their 30,000 customers, and showed that, on average, invoices sent by businesses with an annual turnover of less than £5m take 72 days to be paid, and are requesting payment of approximately £6,000.  “A late payment of this size will have a significant impact on the day to day running and cash flow of that business,” explains Brian.  “With this in mind, it’s not surprising that separate research conducted in 2016 by Bibby Financial Services highlighted that 14% of SMEs see late payments as their biggest challenge.”

The survey by Ormsby Street states that two thirds of letters before action sent by solicitors will result in invoices being paid within seven days.  “This is in comparison to cases where there is not an LBA sent, which results in two thirds of overdue invoices still unpaid after one month of receipt,” continues Brian.  “This research is a positive step towards raising awareness of the power of an LBA, and hopefully more businesses will seek to take control of their debt with an LBA.  Currently only a third of SMEs use this effective tool as part of their debt collection process.”

What is a letter before action?

A letter before action is a letter to your debtor explaining that you are intending to take them to Court, which should be the last resort, if the outstanding payments are not made.   “This letter can be a complex one to get right,” explains Brian.  “It’s not simply a case of explaining that you are planning to take them to Court, but should also go into details about what action you expect from them, whether you are planning to make a claim for compensation, any evidence you have for the outstanding payment, and much more.”

Brian concludes, “While there is a small cost associated with having the LBA written by a solicitor, getting this letter right can mean the difference between being paid what is owed to you within a reasonable amount of time, or ending up in Court and also being responsible for legal fees, which can exceed the outstanding amount.  There are many different options when it comes to debt collection, and seeking legal advice will give you a sound understanding of which is best for your business and your debtor.”

If your business struggles with receiving payments from invoices, or you are currently seeking to recover debts, you can contact Brian on 02380 717717 or email briankirby@warnergoodman.co.uk to discuss your options.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.