UK businesses write off millions of pounds every year in unpaid bills – often unnecessarily. The problem is often at its most serious at the start of the year when trading conditions become tougher, supply chains get stressed and contracts are tested. What do you do if someone owes you money?
Bad debts are written off because there is a general perception that the cost, time and risk associated with recovering the money often outweigh the financial benefit.
How big is the problem?
Unpaid or late payment of invoices is a huge financial drain on businesses, with research consistently showing that companies are owed many thousands of pounds.
Sage Pay, one of the largest electronic payment providers, estimates that small business owners spend on average two weeks a year chasing unpaid invoices. Other research by the insurance website Simply Business showed many small businesses experience problems with non-paying customers and nearly half were left with significant debts.
However, rarely does the issue of unpaid or late payments gain much attention. It often takes a major event such as the collapse of a big company for the media to look at the issue of payments in the supply chain. The collapse of outsourcing company Carillion dominated the headlines, not least because of the significant impact on its suppliers after Carillion owed up to 30,000 businesses around £1 billion in unpaid bills. More recently, the news of Jamie Oliver’s restaurant group and British Steel falling into insolvency just this week; putting around 20,000 roles in their supply chains at risk, only highlights the fact that the problems of unpaid debts is not going away and seems to be growing.
But business failures, or companies just not paying their suppliers, are not the only reasons why suppliers are paid late, or not at all. Another big problem is the institutionalised practice of late payment. Experience shows that buyers that owe money exploit their supplier’s fear of pursuing bad debts as a strategic tool.
Why is the government not doing more to help?
The government has tried to address the issue – but thus far with little impact. In April 2017 the government required all large UK companies, those employing over 250 people, to publish specific information regarding their payment policies, practices and actual performance, including the average time taken to pay supplier invoices. You would expect such a naming and shaming policy to force a business to change – but the actual impact has been limited.
In October 2018, the Department for Business, Energy & Industrial Strategy (BEIS) began looking at the issue of late payment of invoices. As part of this review, BEIS asked businesses to help it to create a responsible payment culture for small businesses and is now reviewing the responses.
According to BEIS’ own data, 32% of SMEs report that late payments result in them delaying payments to their own suppliers, 25% admit that late payments force them to rely on their bank overdraft, and around 15% say late payments mean they struggle to pay staff or business bills. Around half of SMEs report additional costs to their business due directly to late payments. Indeed, late payment is seen as a major obstacle to business success among 33% of SME employers.
If someone owes you money can you go to the police?
There used to be only one option – the traditional litigated process. The Courts encourage companies to negotiate a settlement before beginning legal proceedings. However, as there is no fixed time limit for negotiations to conclude and defendants are often incentivised to delay the financial outcome, the impact on a small business could be catastrophic.
Another issue is that lawyers typically bill you based on the number of hours worked – so the longer a case drags on, the more it costs; the reality is that neither the lawyers nor the defendant have an incentive to find a quick solution. You will also typically need to make an upfront payment before you even begin litigation to cover the court fee to issue the claim form (this can be as much as £10,000), as well as fees for the barrister and any expert witnesses you require. There’s little doubt that the current system is stacked against SMEs.
There is now another option, where fees are known at the outset and capped. The award-winning process called Escalate charges a fixed percentage, 30%, of the damages that are actually recovered, and that fee is not paid unless you win your case. All costs are included in the fee and there are no upfront costs, such as court fees, expert witness and barrister fees, to pay. In addition, a built-in insurance policy means that an SME would never have to pick up any adverse costs order if the case is lost. Escalate targets a settlement inside three months – which compares to the 18-month duration of a typical court case under a traditional litigation process.
Escalate is already helping clients to unlock over £50 million from a wide range of commercial disputes – one of the many reasons why it won four major national awards recently.
So, what should I do?
In order to avoid late or non-payment issues, our recommendation is always to carefully check who you are dealing with and walk away if necessary – even though this can be a hard decision to make.
If you have already suffered losses then do not automatically assume the costs of recovery outweigh the benefits. Talk to us about Escalate, which Price Bailey offers to all of its clients.
For more information about recovering bad debts, please talk to Matt Howard by filling in the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.