The U.K. has initiated legal efforts to combat the issue of late B2B payments in one of the strongest shows of support against the practice on the globe. But new research suggests some SMEs are concerned that legislation, which came into effect in April, could stifle the momentum to encourage on-time B2B payments.
Encompass Corporation found that 40 percent of lawyers and insolvency professionals surveyed are concerned that legal claims against late payers may be unable to move forward because of the new rules.
The legislation ends the insolvency exemption under the Legal Aid, Sentencing and Punishment of Offenders Act 2012. The legislation impacts an array of legal cases involving insolvency, but reports by GrowthBusiness said it can be particularly detrimental to smaller firms, as SMEs that file legal claims against late payers will not be able to recover various fees associated with their legal action should the defendant in the case (the late payer) lose.
"This change in the law may make pursuit of a claim too costly for creditors owed money by a company with assets of value but made insolvent by its directors," Encompass Founder and CEO Wayne Johnson stated.
Encompass Corporation's research revealed that, thanks to this legislative change, 78 percent of those surveyed anticipate a rise in "unscrupulous" business practices, as SMEs will be deterred from bringing legal claims against late payers to court — especially for the smallest businesses, reports said.
A full 100 percent of survey respondents agreed that the legislative change will, at the least, reduce the number of cases in which an insolvency practitioner can proceed with claims against a late payer.
The Smallest Are The Hardest Hit
Those surveyed agreed SMEs were at the highest risk following the legislative move; 60 percent said microbusinesses could see the most harm, considering they often lack the financial resources to pursue legal action against a late payer.
Nearly all of those surveyed (94 percent) said businesses must be more careful when striking a new deal with an unknown business buyer. Industry experts said this, too, is particularly applicable to microbusinesses and freelancers.
According to Ormsby Street analysis, 40 percent of freelancers surveyed said they had taken out a County Court Judgment in the past year in an effort to reclaim outstanding debts; more than half of those surveyed said the late payment problem is worsening. Ormsby Street Managing Director Martin Campbell said credit checks for any new clients are key for freelancers.
"Credit-checking potential customers and partners is straightforward to do and should be done by a freelancer every time they work with someone, to protect themselves against late payment," he stated, according to GrowthBusiness.
Encompass' Johnson noted that SMEs should consider obtaining a lawyer before any new contracts are finalized and to do a background check into a new corporate partner to assess whether they have a history of insolvency.
Out Of Options
For small suppliers owed money by their corporate buyers — the latest analysis suggests more than $90 billion in overdue invoices remain outstanding for U.K. SMEs — the inability to legally retain this information should a corporate buyer go bust can lead to collapse for themselves.
"Too many SMEs struggle to span the working capital gap between completing a job and getting paid," said Rick Hurwitz, CEO of eInvoicing firm Tungsten Corporation, to reporters. "After paying out their costs, they often have to wait too long for their customers to pay them."
And while Encompass' analysis found that insolvency professionals consider the government's efforts to make databases more accessible a positive move for businesses that want to background check their potential partners, GrowthBusiness concluded that the latest legislative change is a major blow to the legal protections that were once provided to SMEs that can't afford to take legal action against their late payers.
"Ultimately, legal action was a comforting last resort for businesses chasing payment," the outlet concluded, "but with the new legal change, this may be an unjustly expensive recourse for companies only asking to be paid what they're owed."