Here’s a summary of an email from a very distraught small business owner:
‘I’ve been contacted by a debt collection agency charging me nearly £10,000 for late payment for invoices, paid between 1-3 days past the invoice due date, over the past 6 years. The agency has been passed my details by the administrator appointed to deal with a supplier I used to buy from. This is going to cause my small business severe financial difficulties. What’s my position?’
Under The Late Payment of Commercial Debts (Interest) Act 1998 (‘the Act’) suppliers can charge interest and compensation on overdue payments. The interest rate chargeable is 8% over the Bank of England base rate. Suppliers can also claim a fixed sum per invoice in compensation: £40 on invoices up to £999.99; £70 in invoices between £1,000 to £9,999.99; £100 for higher value invoices.
Suppliers are notoriously reluctant to invoice for interest and compensation on overdue payments even though it’s their right. They worry about damaging relationships with customers on whom they depend for work. However, if you no longer supply a former customer there’s no working relationship to worry about. If they’ve paid late over the past 6 years it could be worth adding up the sums owed in interest and compensation and invoicing for those. If your customer goes into administration and you do your sums and find you’re owed a tidy sum contact the administrator and ask to be added to the list of creditors. Bear in mind though there’s likely to be little left to pay smaller creditors after priority creditors like HMRC have had any money owed to them.
One of the administrator’s jobs is to make sure as much money as possible, due to a company facing insolvency, is collected, so that as much money as possible is available to pay out to creditors. It’s possible to collect debts owed back as far as 6 years. The administrator may well chase up interest and compensation that would have been due on overdue payments from customers.
In the case above the administrator has found that some of the insolvent company’s invoices were paid late and has contracted a debt collection agency to collect the interest and compensation that the firm could have invoiced for over the past 6 years. This came as a surprise to the small business owner who emailed me.
Let’s face it if you invoiced for £50 and it was paid a few days late you’d probably not risk the relationship with your customer by invoicing for a few pence in interest and £40 in compensation. You’d rather do more work with them. To be fair even with the best payment processes there can be a few days of a lag if the customer only has one payment run every two weeks. But if the customer is going bust the administrator has no relationship to worry about. Their job is to get the money in and even if each invoice was only paid a day or so late, and the interest is a matter of a few pence, the compensation can soon add up. The debt collection industry has known about this for a while. We come across similar cases fairly often.
In the case above all we can advise the small business owner is to check to make sure every penny being billed for by the debt collection agency is accurate. If there is a reason for any payment being late and that wasn’t down to you, such as errors on the original invoice that made it unpayable, push back on that amount. If this is going to leave your own small business struggling, try to negotiate a reduction or a payment plan over time. The last thing we need is more small businesses going to the wall.
For anyone else reading this heed the warning. If you pay later than the agreed payment date, even by a few days, because of the way your processes have been set up, now is the time to get your processes in order. Make sure you can pay by the agreed date, and please don’t simply extend your payment terms. Improve your processes. Small suppliers need to be paid quicker so they can be certain as to when payments will come in and invest in upskilling, training and equipment that will give you better products and services to sell on to your customers. Everyone wins when you pay quickly and on time.
