15 June 2000 | Elizabeth Bellamy
New legislation could help small suppliers suffering late payments from other small companies, according to a senior analyst.
Philip Mellor of consultancy Dun & Bradstreet estimated that 10,000 small companies in the UK went bust last year as a result of late payments by customers. This was one of the main reasons SMEs go under, he said.
Under the first section of the Late Payment Commercial Debts (Interest) Act 1998, which came into force 18 months ago, suppliers with fewer than 50 employees can charge interest on late payments owed by large companies or public-sector organisations. They can charge the base rate plus 8 per cent.
But new legislation, due to take effect from 1 November, will enable small firms to apply the same rules to other small firms they supply.
Small suppliers to late-paying small companies are vulnerable to cash-flow problems under the current legislation, explained Mellor.
"For most small suppliers, if they have 50 customers, two will be large and the rest will be SMEs," he said, adding that small suppliers tend to be hit harder by the problem than larger companies, as the latter can absorb the impact better.
The financial clout of bigger customers makes small suppliers susceptible, agreed David Hands, deputy head of parliamentary affairs at the Federation of Small Businesses. "Large suppliers have got the power to set payment terms - it's unlikely that a small firm would take a large customer to court."
The latest quarterly survey by the University of Leeds' Credit Management Research Centre found that 5 per cent of small firms in the UK had used the current legislation against a late payer. This was up from 2 per cent in the previous survey.
The university also found that 11 per cent of small firms plan to use the new legislation - down from the 18 per cent that said they would six months ago.
The average late payment period was 16 days and 55 per cent of companies in the UK are late payers, according to the survey. The sectors that were particularly affected were business services, and retail and wholesale distribution.
The most common reasons cited for late payment were an unwillingness to part with the money (32 per cent), financing difficulties (20 per cent), disputes and queries (11 per cent) and procedures and systems (9 per cent).
Businesses should be aware that the new legislation could also be used by European suppliers, warned Mellor.
Nick Goulding of industry body the Better Payment Practice Group said far too few firms actively controlled the trade credit they owed, "let alone effectively collect debts".