A recent ICAEW small business round table found that some small businesses won’t insist on fair payment terms in contract, chase up payments that are outside the contractual terms, or simply enforce their rights for fear of upsetting their big business customers.

But some take a more robust view and are up for a fight.

When it comes to enforcement, the UK’s legal and regulatory regime has provided them with a range of weapons, meaning this is not always the David vs Goliath contest some might think.

Be prepared

Understanding the contract terms you have agreed to, issuing invoices in a timely way and keeping good records are essential to running an effective small business and to exercising rights against late payers.

Know your customer

Small businesses may be reluctant to turn down a big name, but if prompt payment is a major priority they might want to consider the business’s payment track record when deciding whether to work with them and on what terms.

Regulations made in 2017 require large companies to report on their payment practices and policies in relation to certain contracts, and the report is published on this government website. Breach of the reporting requirements is a criminal offence.

The Prompt Payment Code was introduced to promote a culture of prompt payment and is now administered by the Small Business Commissioner. It is a voluntary scheme that gives companies and public bodies a framework to commit to good payment practices. It is relatively easy to see which firms are signatories and participants may also advertise their participation through use of a logo. More information about the scheme is available on ICAEW’s Better Regulation Hub.

Outsourcing invoice processing (factoring)

Some small businesses may wish to factor their debts/invoices (in other words, sell their accounts receivable to a third party at a discount) to help manage cash flow. Regulatory reforms in 2018 mean that certain contractual provisions that might otherwise have prevented small businesses from doing this are deemed invalid.

Negotiation/mediation

It can be difficult for small businesses to explain to a big business why prompt payment is so important to them or to alter their behaviour; even finding someone to talk to may be a challenge.

Regulatory initiatives have attempted to address this through the creation of the Small Business Commissioner’s Office, which acts as a free resolution service for complaints/disputes and administers the Prompt Payment Code referred to above. It has limited powers but can help with information and support even if your payment dispute falls outside its remit.

Enforce your rights

If there is no room for a dispute (for example, where it is clear that the goods or services have been provided and the correct amount invoiced) and payment is contractually overdue, then consider talking to the Small Business Commissioner before taking any legal steps. One call may resolve the issue. Obtaining a court order for payment should be relatively straightforward but it can be time consuming, is likely to involve cost and is often intimidating for a small business. However, even issuing a court claim for late payment may focus the mind of a big business.

A statute originally introduced for the benefit of small suppliers in 1998 (but since amended to benefit all suppliers) was designed to encourage relevant businesses to exercise their rights. It states that suppliers are entitled to statutory interest of at least 8% above the Bank of England base rate, and compensation, in addition to the payment of the debt. There is information on claiming interest and compensation and an interest rate calculator on the SBC website.

Raise the stakes

There is another route that is guaranteed to get the attention of even the biggest business. Unpaid creditors can petition for the winding up of the debtor company under the Insolvency Act 1986. Various conditions and formalities apply, and this is not something to be undertaken lightly, but a big business would ignore any such petition at its peril.

ICAEW is asking SME members to share their experiences of late payments so the institute can understand better whether they are aware of regulation that is designed to help them, whether it is effective, and what else might be done to help. Please complete this short survey to share your views.

Further reading on ICAEW’s views

In 2020 ICAEW supported proposals for increased powers for the Small Business Commissioner and in 2022 the institute published an article in which the Commissioner explains the importance for small businesses getting paid on time. ICAEW reiterated its position on powers of the Commissioner in its response to the recent consultation (ICAEW Rep 35/23).