Late payer laws 'a failure'

Changes to the law making it easier for small businesses to pursue late payers have proved a waste of time. Just 3% of businesses have actually used the legislation against their debtors and even fewer – 2% - say it has helped them overcome the problem of bad debt.

The research findings, contained in a survey by chartered accountants MacIntyre Hudson, will come as little surprise to small business representatives who warned that very few people would be likely to use the law to pursue slow-paying customers.

Many small companies are held to ransom by major customers who can virtually dictate the terms on which they do business with them. Fear of losing a major contract means that very few small businesses will ever take a big customer to court, and they know this only too well.

Some 15% of small businesses say they worried about upsetting their clients by imposing interest charges on overdue payments – yet, cashflow problems caused by late payment of bills forces an estimated 10,000 companies out of business every year.

According to the new research, however, only a minority of small businesses are even aware of the legislation. Just under half (43%) of the UK's owner managers said they had heard of The Late Payment of Commercial Debts (Interest) Act, which enables them to charge interest of 11.25% on late payments from their customers.

Only a tiny number – 3% - have actually used this legislation against their debtors.

The biggest flaw in the law, according to business owners, is that it doesn't actually solve cashflow problems. Nearly a quarter – 23% - say that they need the money now rather than getting it later with interest.

Andrew Burnham, partner at MacIntyre Hudson, said the legislation had been introduced with the best of intentions but it had had minimal impact.

?The law was meant to help small businesses combat late payers. However in the six years since it was introduced, it has had a minimal impact. A small business owed a large sum generally needs the money now rather than later with interest. And interest charges are unlikely to deter the serial late payer.

?The most effective way for small businesses to overcome the problems of late payment is to have clearly agreed terms with their clients and ensure they have the resources and systems in place to chase down debtors and recover payment.‘

?Cashflow is vital to a small business and late payment can be a major problem, sometimes with serious or fatal consequences. However, it can be a very delicate issue for the owner manager to tackle, especially when the debtors are large companies who form a large proportion of their revenue.‘

Industry statistics say that at any one time small businesses are owed an estimated £17bn, of which £6.8bn is paid late.

Small businesses have had the right to claim interest and compensation from other small businesses since November 2000. Business leaders claim that the extension of the the right to charge interest on late payments across the board means that big companies would be concerned about potential damage to client relationships.

Today‘s research, however, indicates that low levels of use of the legislation means it has not achieved what it set out to do.