Late payments come back to bite

Here’s a summary of an email I had this week from a very distraught small business owner:

‘I’ve been contacted by a debt collection agency charging me nearly £10,000 for late payments for invoices paid between 1-3 days past the invoice due date over the past 6 years. The agency has been passed my details by the administrator appointed to deal with a company I used to buy from. It fell into administration in December 2023. This is going to cause my small business severe financial difficulties. What’s my position?’

The position is that under The Late Payment of Commercial Debts (Interest) Act 1998 (‘the Act’) suppliers can charge interest and compensation on late payments. Late payments here mean overdue payments, beyond the agreed payment date. The interest rate chargeable is 8% over the Bank of England base rate. Suppliers can also claim a fixed sum per invoice in compensation: £40 on invoices up to £999.99; £70 in invoices between £1,000 to £9,999.99; £100 for higher value invoices.

Suppliers are notoriously reluctant to invoice for interest and compensation even though it is their right, because they worry about damaging relationships with customers on whom they depend for work. However, there is nothing to stop a supplier making a claim in future. If you no longer supply a particular company because they’ve decided to use another supplier, there’s no longer a working relationship to keep. If they’ve paid late over the past 6 years it could be worth your while adding up the sums owed and invoicing for those. Throw an administrator into the mix and many late paying customers could find themselves with surprise bills.

One of the administrator’s jobs is to make sure as much money as possible, due to a company facing insolvency, is collected, so that as much money as possible is available to pay out to creditors. It is possible to collect debts owed back as far as 6 years.

In this case the administrator has worked out that some of the insolvent company’s invoices were paid late and has contracted with a debt collection agency to collect the interest and compensation that the firm could itself have invoiced for over the past 6 years. This will have come as a surprise to the small business owner who emailed me as well as other late paying customers.

Let’s face it if you invoiced for £50 and it was paid a few days late you’d probably not risk the relationship with that customer by then invoicing for a few pence in interest and £40 in compensation. You’d rather do more work with the customer. To be fair even with the best payment processes in the world there can be a few days of a lag if the customer only has one payment run every two weeks. But if that supplier is going bust the administrator has no relationship with you to worry about. Their job is to get the money in and even if each invoice was only paid a day or so late, and the interest is a matter of a few pence, the compensation can soon add up. The debt collection industry has known about this for a while and is always looking for sources of income. We come across similar cases fairly often.

In the case above the only thing we can advise is to check to make sure every penny being billed for by the debt collection agency is accurate. If there is a reason for any payment being late and that wasn’t down to you the customer, let’s say there were errors on the original invoice that made it unpayable, push back on that amount. If this is going to leave your own small business struggling, try to negotiate a reduction or a payment plan over time. The last thing we need is more small businesses going to the wall.

For anyone else reading this heed the warning. If you pay later than the agreed payment date, even by a few days, because of the way your processes have been set up, now is the time to get your processes in order. Make sure you can pay by the agreed date, and please don’t simply extend your payment terms. Small suppliers need to be paid quicker so they can be certain as to when payments will come in and invest in upskilling, training and equipment amongst other things that will give you better products and services to sell on to your customers. Everyone wins when you pay on time.