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Interest-ed parties
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New laws allow operators to charge interest and costs to customers who don't pay — but does it work? Pat Hagan reports.
IT'SA statistic that would deter most people from going into business on their own. According to the Federation of Small Businesses, one in four ventures fail because their cash flow dries up when customers refuse to pay on time.
A survey carried out by the federation earlier this year revealed large public limited companies are often the worst culprits at coughing up cash promptly.
Although standard credit terms dictate a 30day payment period, the survey revealed that some of Britain's biggestcommercial enterprises take an average of 46 days to pay.
Worse still, one in four take longer than 60 days to settle their invoices and a very small minority take an astonishing 200 days or more to pay their bills.
Thankfully, the law does now provide road transport companies with a means of tackling late payments by charging interest and debt recovery costs.
But, in an industry where good working relations are often the key to success, how practical is it to start financially penalising the very customers on whom your business relies?
Late payments have been a problem in British business for years and can arise for several reasons. For some businesses, postponing payments until the last minute is part of their own cash flow management — ensuring they have as much money as possible in the system at all times.
For others, late payments may simply be due to the burden of processing substantial numbers of invoices. However, the law is gradually beginning to close in on deliberate late-payers. Two years ago, in August 2002, the government amended the Late Payment of Commercial Debts (Interests) Act of 1998 to allow all business owners and managers to not only charge interest on outstanding debts, but also to claim reasonable debt recovery costs.
It also made provision for small and medium sized firms to ask a representative trade body to challenge grossly unfair terms used by customers to delay payments for as long as possible.
Under the terms of the Act, hauliers have a legal right to claim interest. Usually, this applies after the standard 30-day credit period has expired, unless your terms of trade or invoices state otherwise.
What you can charge
The amount you can charge is set at 8% above the Bank of England base rate. So if the current base rate is 4%. a firm can legally charge interest at 12% on the outstanding amount.
It's important to note that this interest accrues daily and that, for the purposes of the law, the current base rate is fixed for six-month periods. So, the base rate on 31 December applies to all late payment charges between 1 January and 30 June, while the base rate on 30 June applies to all charges made from 1 July to 31 December.
The law also allows firms to seek modest debt recovery costs, which are set according to the amount that is owed. It for example, your company is owed less than £1,000, you can legally charge £40. If the debt is between £1,000 and £10,000, you can charge /70, while if it's anything over £10,000, the debt recovery fee is set at UM.
Interest should be calculated on the overall debt, including any VAT that is owed. However, VAT should not be charged on the interest itself.
Government advice is for businesses to make it clear to customers that they plan to start charging interest. And it's best to make it clear that this is a statutory right designed to protect your own interests, rather than just another way to squeeze more cash out of your clients.
But there are wider issues to be considered before any road transport firm imposes such penalties.
Government advice, set out on its Business Link we bsite — www.businesslink.gov.uk—urges companies to consider the possible consequences of charging interest: • Consider your relationship with the client and their importance to your business — is it worth risking a dispute with a major customer over a late-paid debt?
• Ask customer-facing staff— particularly your sales team — how they think customers may react to being charged interest.
• Find out what other businesses in your industry do — it's probably best not to charge interest if other businesses in the area are not charging.
The we bsite also points out that firms need to decide if they want to limit charges to a few had payers, rather than apply them across the board, and to double-check their own credit-control systems to see if they are already doing all they can to chase up unpaid invoices.
But how do hauliers deal with late payments; and are interest charges a realistic option? Freight Transport Association spokesman Geoff Dossetter says it's not clear how many truck operators are enforcing the law, but the evidence suggests just having the option to demand interest has been of benefit.
"The feedback we've had is that it's helped in terms of bringing forward payments," he says.
John Johnson, director of Slough-based firm Saints Transport, says the firm has devised its own way of tackling the issue and has not resorted to charging interest.
"We don't really have a problem with late payments. But one of our biggest accounts is a major air freight company and if they are late with payments we just threaten to pull our vehicles out.
"We can afford to do that because we have a wide customer base we don't have all our eggs in one basket, like some of the smaller hauliers,he says.
Johnson insists most customers understand the problems because they, too, are involved in the transport end of their business.
Rob Beddows,managing director of Merseyside-based Falcongate Freight. claims the firm has a good working relationship with its customers and late payments are rarely an issue. However, one rogue client ran up bills of more than I5,000, which the firm had to recoup through the Small Claims Court.
"Now, if we do get a new customer, then the first few jobs are payment on collection," he says.
Taking legal action should generally be regarded as a last resort, but hauliers can now apply online to pursue claims of up to £5,000 through the Small Claims Court without involving solicitors (see panel). •