Collecting debts remains a life or death struggle for London's small firms despite the new law allowing them to charge interest on overdue bills.
Latest figures from the Federation of Small Businesses show that only a third of companies pay their bills within the agreed time, and business advisers say the late payment law has had little impact since it was introduced two years ago.
According to Richard Joseph, Chairman of the London Society of Chartered Accountants' (LSCA), the legislation has proved to be useless and unworkable.
"It’s a nice idea, but it’s exactly what you would expect from people who have no business experience," he said.
"No small firm is going to upset its big customers by claiming a few pounds a month interest, and if payments are late, they just have to grin and bear it".
Chartered accountants say the effect on cashflow caused by late payment remains a serious threat to the existence many small firms who have difficulty funding working capital.
As a result, there has been a steep increase in the practice of ‘selling’ debts to finance organisations who provide debt factoring and invoice discounting.
Typically, firms using the service are paid between seventy and eighty per cent of the total invoice, but it is a price they are prepared to pay for receiving the money promptly.
In the past seven years, the amount of invoice finance has increased from one-and-a-half billion pounds to five billion pounds, while bank overdraft advances have fallen by five billion pounds.
The advice from chartered accountants working with small firms is to avoid using debt factoring as a last resort, but as a tool to generate cashflow in times of rapid growth.
The third phase of the late payment law - Late Payment of Commercial Debt (Interest) Act – comes into force next year, when large listed companies will be able to claim against their small firm customers.
It raises the possibility that the big fish might not be so reluctant to upset the small fry by claiming interest.
The FSB is urging small firms to reinforce credit management procedures by:
- establishing terms of trade clearly before providing or ordering goods and services
- receiving a returning a signed delivery note for all goods and services
- sending and paying invoices on time
- checking payment times of prospective customers
- refusing to agree plans taking more than six months to clear a debt.
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