Late payment of suppliers
Late payment of suppliers can be crippling especially for SMEs. Large corporates are some of the worst offenders. The strong purchasing power of large businesses enables them to force suppliers to await payment. But, there is an additional solution for SMEs to consider as we explain via the Commissioner for Small Business.
Provisions have been implemented to strengthen the position for smaller businesses. The idea is a streamlined process of invoice payment.
We look at:
- How the position has improved for SMEs;
- Other methods which can help facilitate quicker payment; and
- Unfair contract terms and payment provisions.
The Enterprise Act 2016
The Act establishes an independent Commissioner to support small businesses. The government has recognised that small businesses are often forced to await late payment from larger corporations. That has a negative impact on cash flow. There is often little that the smaller business can do, except await payment. That then affects the smaller business’s ability to obtain its own favourable credit terms with its own suppliers as it does not have sufficient cash flow to demonstrate an ability to pay. There is a domino effect.
The new function
As part of this new role, the independent Commissioner will provide an in-house complaints function. This function will permit the non-defaulting party to seek a decision over payment. The Commissioner will provide a decision on the payment dispute. The power does include the ability to recommend that the defaulting party immediately pays the invoice due.
The main headline points and information that the Commissioner will likely require are the:
- Standard payment terms;
- Length of outstanding invoices;
- Amount outstanding;
- Interest rate to be applied;
- Any reason to refuse payment; and
- The businesses’ future trading intentions.
The Commissioner can then assess the information provided and give a determination.
Alternative methods of procuring invoice payment
The complaint to the Commissioner function can run parallel to other litigious means to procure payment. A business’s position will likely be maximised if a complaint is lodged with the Commissioner, and at the same time:
- A winding up petition is presented against the defaulting party. This is on the basis that an invoice has been submitted, it remains unpaid, and it is therefore assumed that the defaulting party is unable to pay its debts as they fall due, and thus insolvent; or
- A letter before claim is sent to the defaulting party. This will set out the dispute, the late payment, the sums outstanding, and the interest due. The level of interest claimed will depend upon the terms of the contract, and relevant statutory provisions. We advise and then calculate the claim.
Unfair contract terms
The terms of a trading relationship between a small business and a large corporate will often be governed by the large corporate’s standard terms. Standard terms are open to scrutiny, and may impose provisions relating to payment that are unfavourable to the supplying business.
Focus on special sectors such as Fintech
The courts will often interpret contract terms between parties in the event of a dispute. In a business to business contract, the courts will tend to look at the equality of bargaining power. Strict interpretation is often the method of analysis that the courts adopt. For contracts and terms and conditions relating to the provision of services in the finance technology sector, the courts will look at the size of the parties as a first step. That may evidence a presumption of an inequality in bargaining power.
But, if the terms have been negotiated and lawyers have been involved, then that presumption can be negated by the larger party. Relying on presumptions and interpretations is not a solid footing and best avoided. We understand why SMEs are often keen for the business and do not want to “blow the deal”. We find a work around to provide the best protection in the circumstances.
Research shows that most small businesses do not consider the terms of engagement. We provide the advice necessary to give you the full picture. Without understanding the terms of engagement, you will be signing up to terms that may be unfair, and thus open to challenge. If the terms are challenged or negotiated, then late payment is unlikely to be an imminent risk.
Helen Curtis is a partner in the commercial team with a focus on solving issues arising for SMEs.