The Growing Dangers of Late Payment for Businesses that Pay Late

In the current business climate most same day courier companies are more concerned with how quick they can collect the money due from their customers than they are with whether they pay their suppliers late. Quite often all the money coming in goes straight out to the ‘important’ creditors – fuel card company, van hire, landlord, drivers’ wages etc, leaving the ‘less important’ suppliers to wait for their overdue payments.

I’ve warned many times of the dangers of running businesses like this and it seems from anecdotal evidence that some companies are finally having to count the cost of paying their suppliers late.

With the soaring cost of fuel and the general slowdown in the economy it seems that some transport company owners have decided that it will be more profitable to cease their transport operations and concentrate on collecting the outstanding debts accumulated under the late payment legislation.

The Late Payment of Commercial Debts (Interest) Act 1998 (see http://www.payontime.co.uk for further information) gives businesses a statutory right to claim daily interest from other businesses for the late payment of commercial debt. In addition businesses have the right to a compensation payment of between £40 and £100 for each invoice which is paid later than agreed terms. If no terms are agreed then the terms default to the later of 30 days from the day the service is performed (for pre-agreed amounts) or 30 days from the date the cost is confirmed.

Both the interest and the compensation payments are chargeable on each invoice paid late, are payable on demand and are claimable up to six years after the date they become payable – i.e. up to six years after the payment becomes late. They are payable even after the initial debt has been paid in full.

Companies are potentially storing up a time bomb by paying their customers late. As an example, a courier company which carries out 5 local jobs per week for a customer over a 6 year period, each one of which is invoiced on a separate invoice and each one of which is paid late, could potentially issue a claim after 6 years for £62,400 against that one customer in late payment compensation charges alone.

If a company issues just 25 invoices each week which are paid late then after 6 years they have ‘earned’ over £300,000 in late payment compensation charges, assuming their customers are still trading. For a transport company earning minimal profits in the current financial climate this is a tempting alternative income stream.

Of course many companies are reluctant to claim late payment charges, but the debt exists whether they claim them at the time or not. What seems to be happening at the moment is that companies are looking back at debts that have been paid late in the past and if they’ve not traded with the customer for a while, or they don’t really care if they lose the customer’s business, they’re putting in their claims under the late payment legislation.

We’ve recently received a claim such as this from an ex-supplier for 3 invoices which he believed were paid late in early 2006. The supplier actually ceased trading a few months after the invoices were issued but being a sole trader the individual concerned has chosen to supplement his current income by milking the customers of his previous business.

In our case he was unsuccessful – we’d settled all the invoices with his factoring company on the day they were received; we assume that the factoring company (as they often seem to) had applied our payments to the wrong invoices or the wrong account. We were saved from having to pay £121.17 purely because we’d both paid the invoices on time AND kept a proper record of the date the invoices were received and the date the invoices were paid. In the latter respect we were helped because we only ever pay our suppliers by BACS or online banking and always keep a proper record of the date the payment leaves our account.

I would suggest that anyone wishing to protect themselves against future claims under the late payment legislation takes the following steps:

  1. Keep a record of all debts as they are incurred. Using a Purchase Order system will help achieve this but it’s not essential. When you receive goods or services from your supplier make a note of the date, the supplier’s name and the amount due and check off each invoice received against your list at the time of receipt. If you’ve not received an invoice within a couple of weeks of receiving the goods or service then contact the supplier to chase the invoice – fax or email is best because you can create an audit trail of having requested the invoice.
  2. Record any invoices as they’re received. Date stamp every received invoice and check it off against your list of due invoices.
  3. Pay the invoice within the agreed terms. If you didn’t agree terms at the time you ordered the goods/services then check if you were expected to have read and agreed to the suppliers standard terms before ordering. If no terms were agreed or specified by the supplier then pay the invoice within 30 days of either receiving the goods/services or the invoice date, whichever is earlier.
  4. Notify supplier of queries or disputes. If the invoice is disputed or queried then inform the supplier at the earliest opportunity and keep a record of the date that the dispute/query was raised and the date of the response. If the dispute/query is resolved then pay within the original agreed term (or 30 days if no agreement) or within  a reasonable time (say 7 working days) of the resolution of the dispute. Keep a full record of all relevant actions, the date, time and the people involved.
  5. Pay your suppliers by BACS or online banking. It’s easier to prove that the payment left you account on the right day than it is to prove that you didn’t  date all your cheques 3 weeks before you sent them. We save a screenprint of every online banking payment so that we can quickly check when payments were made without contacting the bank for confirmation. The screenprint doubles as a Remittance Advice for sending to our suppliers by email.
  6. Agree payment terms in advance. If there’s an ‘understanding’ with your supplier that you will pay on terms other than 30 days from service (or 30 days from invoice) then ask your supplier to agree to the terms in writing before any work is carried out. Stick to the terms that you’ve agreed.

All this is a lot harder to write down than it is to do. It takes no real investment in time other than the initial planning of your system. Your list of invoices you’re due to receive should already be available in your booking or accounting system. If not then a simple list in Excel (or even in a notepad) of every purchase you make, will be a useful source of information for your business in any case. We run just such a list in Excel, revenue and cost recorded for each job, and the supplier’s and customer’s name. We can see profitability of a day by day basis, see which suppliers haven’t invoiced us and easily see which customers produce the most profit for us.

On a closing note, it should be noted that these late payment charges are assignable. Even if your mate Joe’s business doesn’t charge you when you pay late, the subsequent owners, or liquidators, of the business may chase you for late payment charges.

If it’s not happened already it seems only a matter of time before companies are set up to buy the rights to accrued late interest charges from failing businesses. When this happens there will undoubtedly be a lot of businesses whose bad payment record will come back to bite them.

You may be interested in this page, giving the specifics of a claim for late payment charges that we made against an ex-customer.

The ex-customer engaged a top firm of solicitors to avoid paying the claim, presumably at condiderable cost, but ended up paying our original claim plus court costs anyway.

I’m very confident that we would have won the case no matter what, but the notice about late payment charges on each of our invoices avoided us having to go to the trouble of actually proving the case in court.

Posted under Courier Business, Courier Financial Issues, Late Payment, Legal Issues

Posted by Alec at 2:34 pm, August 16, 2008

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1 Comment so far

  1. You might like to have a look at our site http://www.due2pay.co.uk. It’s a site which encourages late payers to pay on time, if they do not pay up then they are listed on our web site. Members can also create a watch list of companies which may be existing clients or ones which they hope to do business with. If these companies are ever listed you will get an email to tell you so. You will then be able to contact the company which listed them, this is something which you are never able to do in the normal course of events

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