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A helping hand from Europe on payment performance?

PUBLISHED: 11:13 29 April 2013 | UPDATED: 11:56 15 May 2013

Simon Marks, Head of Debt Recovery, BPE Solicitors LLP, Cheltenham

Simon Marks, Head of Debt Recovery, BPE Solicitors LLP, Cheltenham

Clint Randall - pixel pr phototography

Can the impact of late payment on businesses be minimised by statutory intervention or is slow payment an inevitable burden that just has to be accepted by credit providers?

Arguably, many Gloucestershire and Oxfordshire businesses could do more to look after the financial health of their companies and all too often, long term debt is allowed to sit on balance sheets for fear of upsetting customers or getting involved in an adversarial and potentially expensive formal recovery process. All Financial Directors and Credit Managers will champion a ‘cash is king’ business ethos and a regular flow of cash is essential to the smooth running of a business. The unfortunate reality however is that many SMEs do not have reserves or a generous overdraft facility to allow them to wait for payment of what they are owed without impacting serious damage on their bottom line. In blunt terms, however robust their credit control system is, many businesses are not resilient enough to ride the storm of protracted payment delays from multiple debtors.

The statistics are slightly historic but you’ll surely agree that the magnitude of the figures is absolutely staggering. The 2012 Late Payment Index from Experian suggests that there may have been a recent slight improvement in the late payment culture. I’m not suggesting seismic changes or the return of some smiling faces in the credit control departments (and there will always be hardened ‘professional’ debtors dodging their responsibilities), but due to a bit of a recent nudge and helping hand from our law makers in Brussels, a sense of optimism might just be around the corner…

So what’s changed?

The Late Payment of Commercial Debts Regulations 2013 came into force on March 16, 2013 and implements an earlier European Directive, helping combat the problem of late payment in commercial transactions. The new regulations add some extra weight to the provisions of the Late Payment of Commercial Debts (Interest) Act 1998, a fairly well-known mechanism for obtaining preferential interest where commercial debts are paid late, the applicable rate being 8% over bank base rate and ‘late’ being defined as 30 days from the date of the unpaid invoice. When dealing with Euro area countries, creditors are entitled to a statutory rate of at least 7% over the European Central Bank Rate.

The new regulations re-affirm the late payment interest entitlement and also remind us that, in addition to interest, businesses are entitled to charge a late payment ‘compensation’ fee ranging between £40 and £100 depending on the value of the individual invoice. In my experience, business directors and managers have sometimes been reluctant to apply these penalties to the outstanding account balance for fear of upsetting a long standing client/customer relationship and have just breathed a sigh of relief when the principal debt was paid at long last!

The 2013 regulations have introduced an additional incentive for previously savvy debtors to settle accounts within the agreed credit period and that is the implementation of the creditors entitlement to recover their ‘reasonable costs in attempting to recover the debt and any unreasonable attempt to exclude recovery of those costs will be of no effect’. This is an important change and it should mean that any business employing a lawyer or debt recovery agency, will be able to add on the third party charges to the debtor’s account balance and attempt to recover the principal debt, interest and in practical terms, all of their ‘pre-legal’ costs.

It’s too soon to assess the impact that this new piece of statutory regulation will have on the cashflow of local businesses but the government and our European “masters” deserve some recognition for their courage and efforts in trying to address the inherent late payment culture suffered in the UK for the past 100 years or so and perhaps we are beginning to see a slight change in the way that businesses take responsibility for their actions.

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