The Debate: Tackling late payment

Bad debt: whose responsibility?

By Gary Ling

The problem of bad debt is a perennial one for the business community, especially for the small to medium-sized businesses that drive the UK economy. So far the only measures taken to protect them from this problem have been in the form of government legislation that aims to help the recovery of the money owed by their debtors. But this approach has proved inadequate to date. If businesses are to be protected, they will have to take matters into their own hands.

The root of the problem for small businesses is payments that are severely delayed or never materialise can be sufficient to force them into bankruptcy. This vulnerability is at the root of over 10,000 company bankruptcies every year. Even more alarming is the fact that DTI figures show UK SMEs are owed a staggering £6.8bn at any given time.

But more legislation isn’t what business really needs. Scarcely a week goes by without another story about the ever-increasing bureaucratic burden that red-tape places on UK businesses. This particular piece of legislative interference is unlikely to achieve the desired results.

The legislation is flawed in principle and practice. The practical problem facing SMEs, those the Act was most intended to help, is that they are unwilling to enforce their rights under the Act for fear of alienating existing and potential customers. So far no claims under the legislation have reached the courts.

If the business community accepts the need for this kind of paternalistic legislation, then they will have abandoned the claim that business relationships are part of the private sphere of life and, as such, should be free from government interference. Having demanded legislative protection from each other, business leaders can hardly argue against further government interference for the protection for workers or consumers.

But the most significant shortcoming of this Act is that it deals with bad debt after it has been accrued, rather than attempting to stop it occurring in the first place. Prevention is better than cure and the challenge for businesses is to manage finances in such a way as to avoid bad debt, not rectify the situation at a later date.

  • Gary Ling is CE of checkSURE, the online credit checking company.

Is late payment working?
By Matthew Fell

Since August all businesses have been able to claim interest from customers who are late paying their bills. They can also charge reasonable debt recovery costs. But will this make any difference?

It’s too soon to say whether this change has encouraged firms to pay up more quickly, but in 1998 the UK became one of the first European Union countries to introduce some form of late payment legislation. We currently have one of the best records on payment practice in Europe.

Clearly, legislation has some influence but the Confederation of British Industry believes the law is at best a deterrent. Business views it as a last resort and, while it has a role, it’s most effective when used as part of wider credit management techniques.

Small firms in particular have two major reservations about resorting to legal channels to secure payment. Firstly, it’s almost certain to jeopardise any chance of future business from that customer. Many firms take the view that they would sooner have the contract and get paid ten days late than not have the contract at all.

Secondly, pursuing late payment through legal channels can be costly and time-consuming. Even if there is a chance of recovering these costs further down the line, small firms often do not have the resources to make this investment up front.

So the jury is out on just how big a role legislation can play in tackling late payment. It is part of a package of solutions, but culture and attitudes also play a large role. Many larger firms are operating codes of practice on better payment, which is perhaps the best solution all round.

The CBI believes that having got legislation in place, future government action should concentrate on tackling the cultural issues surrounding late payment. Such steps might include raising awareness of the effects of late payment, promoting the the legislation and producing guidance for businesses considering enforcement through the legislation.

  • Matthew Fell is the head of the CBI Enterprise Group.

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