Oct 09, 2018

Government reforms small business bill in the battle against late payments

Small Business Minister, Kelly Tolhurst, recently submitted new laws to Parliament to support small businesses and suppliers in the battle against late payments. As part of the Government’s modern Industrial Strategy, the new laws will be a step towards boosting the economy and supporting small businesses’ growth.

 

 

Last year, Bacs, the company behind Direct Debit and Bacs Direct Credit in the UK, published research into late payments among smaller UK businesses, revealing that the UK’s SMEs are facing a total bill of £2.16 billion in late payments. With 1/3 of companies facing delays in payment of at least a month and 20% having to wait more than 60 days beyond their terms, larger companies have been accused of abusing their market position by blocking access for SME invoice finance through binding contract stipulations. Tolhurst recently commented that “Larger companies know that if they impose long payment terms or simply pay late, the imbalance of power means that their small suppliers are unlikely to act against them . . . these onerous terms prevent suppliers from accessing the finance they need to thrive and grow.”

Under the new laws, contractual restrictions that allow larger businesses to stop their suppliers from assigning ‘receivables’ – the right to receive the proceeds from an invoice – that are agreed after 31st December 2018, could have no effect. Furthermore, they may be eligible to be disregarded by small businesses and invoice finance providers. This could mean that from 2019, small businesses will be able to assign their right to be paid to a lender. With an estimated £9.5 billion worth of SME invoice finance available to small businesses, suppliers can apply to lenders, such as banks, for up to 80% of the value of the outstanding invoices. The initial advance is received within a few days and the balancing 20% (less fees and charges) is paid when the customer settles the invoice.

Given that 32% of SMEs are forced to pay their own suppliers late, due to overdue invoices, and 25% rely on bank overdrafts to make essential payments, the reassignment of the right to be paid could dramatically improve company cash flow and growth, in turn benefitting the UK economy by an estimated £1billion. Furthermore, invoice finance is not borrowing, because the supplier is receiving an advance against a future payment. “These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply,” Tolhurst said.

Are there other solutions?

Not all SMEs have late payment problems. 29% of those businesses claim that collecting payments by Direct Debit helps. Similarly, over two thirds of SMEs that don’t experience these problems are paid by Bacs Direct Credit. Get in touch to book your place at our popular one-day course, Direct Debit Made Easy.

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