When does a late payment become bad debt?

3rd Aug 2017

The scourge of late payment is both commercially and ethically wrong. Seventy three per cent of small businesses report that they have been paid late in the past year. Small businesses suffer cash flow problems, not when they make less profit, but when work is not paid for in the stipulated time frame. Help is now at hand for them with new regulations making larger companies publish information concerning how long they take to pay their suppliers.

In order to be affected, companies and LLPs have to exceed two or more specified thresholds based on when their last two balance sheets were published. The thresholds are determined by the definition of a ‘medium-sized’ business under the Companies Act 2006. This means an annual turnover of £36 million, a balance sheet total of £18 million and an average of 250 employees during the year.

From 6 April 2017, qualifying companies have to publish information, on a Government website, about their payment practices and policies and how they have performed against them and to update the information every six months. This includes the average time taken to pay suppliers – failure to report will be a criminal offence

The aim of the new regulations is to tackle concerns about adverse treatment of smaller suppliers by larger, more powerful customers through increased transparency and scrutiny.

Large companies can sit on a substantial amount of cash, so it seems unfair if they don’t pay their suppliers or sub-contractors on time. It has been reported recently, that based on recent figures from BACS payment processing, a sum of £36.5bn is owed to small firms in late payments.

It is important for larger businesses to clarify if they need to report under the regulations, they also need to review the thresholds regularly as they are bound to be updated in the future. A real benefit for small businesses will be their ability to discuss with new customers if they are required to report or not and if they are, they can check out payment performance as part of any pre-contract checks.

It’s also worth remembering that there are existing measures already available to tackle late payments, this includes the option of claiming interest and recovery charges, so it is important to check that any existing contract terms don’t undermine those rights with something less advantageous.

Our debt recovery team have wide experience in acting both promptly and decisively when dealing with monies owed to their clients. We understand the importance to a business of prompt payment and how cash flow can affect a company.

If you would like to discuss this matter further please contact me (eg@rogers-norton.co.uk) or alternatively Maria Taylor at mt@rogers-norton.co.uk or on 01603 675613.