Small businesses are leading a fight back against larger firms who fail to pay them on time, or even at all.
Recent research by the Federation of Small Businesses highlighted a growing culture of ‘abuse’ among larger companies who are stringing out payment terms to up to 105 days, dramatically affecting smaller businesses’ cash flow.
The Federation said many small firms were being strangled by such extended payment terms, and although legally they are able to reclaim the debt with interest added on, many were choosing not to go down this route, for fear of losing out on future contracts.
But many small businesses who cannot afford to wait up to three months for payment, are staging a fight back, opting to use their right under the Late Payment of Commercial Debts (Interest) Act to reclaim unpaid invoices with interest.
Jonathan Chadwick of Stephensons Solicitors LLP says: “The research by the Federation of Small Businesses highlights the pain felt by many small businesses on a daily basis, who are struggling to pay their own bills because their debtors won’t pay on time.
“This is symptomatic of our experience and in fact many small firms lack the resources to be able to cope with such blatant abuse of the customer/supplier relationship. Ultimately, larger firms who fail to pay invoices within agreed terms are using their suppliers as an unofficial source of interest free credit.
“However, we are seeing a fight back by businesses who simply cannot afford to wait any longer for their cash. Many are also using their legal right to reclaim the debt with added interest of eight per cent above the existing base rate. There is not much to gain from doing business when profit is eaten away by late payment.”
Jonathan believes a large percentage of businesses are not aware of their right to reclaim debts with interest added on, and many more are worried about using tough methods to chase payment on outstanding invoices because of the potential financial repercussions to their business. Jonathan has seen many small businesses having waited more than 100 days before getting payment from larger businesses. In this time cash can run very tight in companies and this can in turn result in insolvency.
But he added: “In our experience, sending a ‘letter before action’, which gives the debtor seven days to pay before legal action is taken prompts the majority of late payers to part with their cash.”
Stephensons can issue a letter before action for just £10. If this does not encourage a debtor to pay their bill, a solicitor can issue a claim with the County Court or the High Court, to which the debtor then has 14 days to respond. If they do not, a solicitor can automatically enter a default judgment, known as a CCJ. This will affect the debtor’s credit rating if they fail to pay within one month and enforcement proceedings can then be started at any time after this.
Jonathan added: “The impact of the credit crunch is being felt by all, and it’s even more chronic for small firms who need their cash flow to run smoothly in order to survive in this tougher climate. Large companies have a moral duty to their smaller counterparts to behave responsibly.”