It is believed that 50,000 SME businesses fail each year due to non-payment of bills according to a report from the Federation of Small Businesses. But this could soon change with new legislation due to come into effect.
Simon Key, associate and head of Nelsons Solicitors’ debt recovery team, says there are many cases where start-ups and fast growing SMEs launch into the market only to fail a year in because creditors fail to pay their bills.
He said: “Cash flow is a huge part of seeing businesses succeed. A healthy cash flow can be the difference between success and failure in that vital first year. Late payment of bills can have severe consequences for businesses. When we collect debts for our clients, we often find that the reason for non-payment is itself non-payment further down the line.
“When we collect a debt for a client, it moves the problem on to the next business. This is noticeable across all business sectors.”
New changes to the law in April 2017 will see large firms with a turnover of more than £36 million required to disclose the way they treat suppliers.
It is estimated that small businesses are owed in excess of £25 billion in late payments. This has a big impact on the economy as a whole.
Simon added: “This is a well-known problem, but it has taken until now for Government to act. Information will have to be supplied to The Department for Business, Energy & Industrial Strategy (BEIS) twice a year. BEIS will then post the information on a website for public access.
“This public access to how large firms operate will mean suppliers will be able to check the record of those who they are proposing to deal with and either refuse to work with them or consider adjusting their payment terms. It is hoped that this `name and shame` approach will help to cut out bad business practices.”
Failure to comply with the new rules could lead to BEIS pursuing criminal proceedings against the companies and their directors. The Court can also impose fines for non-compliance.
Simon said: “I hope that introducing transparency into the process will help SMEs to improve their cash position. There will always be problem accounts for businesses, but improved cash flow will bring significant benefits to business.”