Contractors will continue to suffer from late and non-payment by their clients until legislation is passed that has real teeth and resources are invested in enforcing it.
A recent Institute of Directors’ survey shows that two-thirds of small to medium sized enterprises (SME), which includes limited company contractors, are suffering from payment delays. So the problem is clearly widespread.
The late payment legislation currently in force says that a payment is late if it arrives 30 days after the invoice has been sent, or when service has been performed if this occurs after the invoice. But it also says that this period can be extended by mutual agreement, and if extended to over 60 days it must be fair to both parties.
Of course, what seems perfectly fair to a large corporate client is almost certainly not fair to a one person contractor limited company. And who holds the balance of power in this relationship? Not the contractor.
The Association of Independent Professionals and the Self-Employed (IPSE) is right to keep pushing for tougher late payment legislation and, in its absence, for the rapid creation of the Small Business Conciliation Service announced by the government to resolve late payment disputes.
Support for effective late payment legislation is widespread. IPSE commissioned a ComRes survey that questioned 1,000 employees and self-employed professionals about their views on late payment. IPSE found that: “79% support strengthening rules to prevent this issue. The survey also found 78% of people support developing a way for small businesses to settle disputes without court action.”
IPSE has called for legislation to outlaw outright any payment terms that extend beyond 30 days. It wants automatic 10% fines applied to any payments that are made after 60 days from invoice.
However, the reality is that big business has deeper pockets and a louder lobbying voice than the small business community. Even with organisations such as IPSE, the Federation of Small Businesses (FSB) and the Institute of Directors (IoD) throwing their weight behind the late payment legislation campaign.
As a result, until late payment legislation that can and will be enforced is proposed and comes into force, contractors need to maintain best practice measures that will ensure that they get paid when contracting.
This includes completing credit risk assessments of prospective clients, negotiating favourable payment terms, enshrining them in the contract and enforcing them if the client defaults. Efficient credit controls that identify when a client’s payment has failed to materialise after the terms should be put in place.
Contractors also need to get tough with persistent late and non-payers, going down the legal debt recovery route if required. In most cases, late payment by the client represents a breach of contract, so contractors should stop working for free and start finding a contract with a client who pays on time.
Late payment legislation remains unchanged and the planned Small Business Conciliation Service is an unknown quantity. So, contractors should focus on minimising the pain of late payments and count any change for the better as a bonus.