Late payment is crippling SMEs

On average SMEs are waiting for 41 days more than the agreed customer payment terms. A staggering £24bn is owing to SMEs at any one time and 37% of late payers are taking between 1 and 3 months to settle invoices.

For small businesses working as sub-contractors this can prove fatal. Often the main contractor has been paid and yet the sub-contractor still has to wait.

The Law Society said recently that there are safeguards in place to protect businesses against blocks in cashflow but that these are being overlooked.

The president of the Law Society, Robert Heslett, said that a lack of cash flow can cripple SMEs. SMEs have difficulty raising funds from the banks and when their cash flow is further restricted due to late payers the consequences can be very severe.

SMEs and new businesses are already faced with a large amount of red tape, so it is hardly surprising that they do not seek late payment protection. However, in this uncertain economic climate, it could make all the difference between survival and bankruptcy.

Clear terms on late payments can be laid out by a solicitor in a carefully worded contract. These can include penalty clauses and stringent time lines for settling invoices. Such terms can be an effective deterrent and encourage prompt payment.

Heslett also advised SMEs that there are alternative options to court action when dealing with debtors. A lot of solicitors specialise in mediation and Alternative Dispute Resolution which can lead to a successful outcome and a well-drafted contract can help stop the problem occurring in the first place.

The impact on the European sector is so severe that the EU is considering updating a directive aimed at tackling the problem of late payments.

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