How Can Small Businesses Resolve Payment Disputes?

February 8th, 2017

pay dispute

Payment disputes and late payments are major issues for small businesses, which can lead to cashflow problems and in extreme cases even threaten a company’s survival. The Federation of Small Businesses (FSB) has recently highlighted the issue and called for the system of resolving disputes to be made simpler, with greater use of alternative dispute resolution. The Government has promised to take action, but will the measures be enough?

As a supplier of serviced offices to rent, Basepoint works closely with small businesses, so all issues affecting SMES are important to us. We operate affordable office centres in areas including Evesham, Southampton, Exeter, Northfleet and Shoreham.

Here we look at how payment disputes are causing serious problems for many UK businesses, and ask what can be done to ease the situation.

Late Payments and Disputes
A recent report by the FSB revealed that small companies across England and Wales are losing out by more than £11 billion annually because of business disputes. Around 7 in 10 businesses have been involved in at least one legal dispute over a five-year period, with nearly 75% of these cases involving payments. Some small companies even end up closing down as a result of clients not paying.

According to the latest available Government figures, the late payments owed to small and medium businesses in June 2015 amounted to more than £26 billion, giving some idea of the huge scale of the problem. It is believed that prompt payment could prevent thousands of small companies from closing down each year, saving jobs and contributing to the economy.

What Action is Being Taken?
The Government is appointing a Small Business Commissioner, who will start to support small businesses over payment issues in the autumn of 2017. A consultation has been taking place over exactly how the new commissioner will operate.

Other measures are also being taken during 2017 to crack down on larger businesses who take too long to pay their bills to small companies. Starting in April, a new “Duty to Report” means that large companies will be required to publish information twice a year over their payments record, including the average time taken to pay invoices.

What Can Small Companies Do to Resolve Disputes?
Small business owners often do not have the time to spend chasing up debts, because they need to focus on other business-critical activities. There is also a concern that if you push too hard for payment you might antagonise an important client and ending up losing their business. However, if you hold off demanding payment and go on providing services for someone who already owes you a lot of money, you inevitably become even more exposed, and a vicious circle can develop.

To deal with late payments, it can be helpful to get expert advice, not only from a solicitor but also from other professionals such as small business accountants. It’s important to send out invoices on time and clearly stating your terms, and to follow up quickly if the payment date is missed, with a professional and friendly reminder.

You can then check that they received your invoice and have all the correct payment details. It is often easiest to do this via a phone call, but it can also help to choose software which sends out an automatic initial reminder if a bill has not been paid. Making initial credit checks before taking on a client is another safeguard. Of course, if a customer still does not pay after an initial reminder, further reminders will be needed and eventually you may have to contemplate legal action.

As well as costing time, chasing up debts can cost a lot of cash, with legal disputes only adding to the strain on a company which is already owed money. Most disputes are resolved informally, but in around a fifth of cases they end up going to court. This is expensive, since the FSB estimates that the cost of settling a dispute could approach £17,000, which is often a similar figure to the money a company is owed.

At present, it is estimated that under 10% of SMEs use Alternative Dispute Resolution, such as mediation, to settle disputes.  This is probably in part because it can be difficult to know where to turn to arrange ADR. However, this type of procedure has many advantages over going to court, since it is less stressful and can often be carried out far more quickly, without you having to lose so much business time. It is also often a lower-cost solution.

The FSB wants to see the new Small Business Commissioner act to strengthen ADR, looking at how it can be made more effective for SMEs. It is also pressing for an online hub to be introduced where companies can get support as soon as they find themselves facing a dispute, before the situation escalates further.

If you rent serviced office space from Basepoint Business Centres, you will be able to benefit from our free MiBase business support service, which enables access to experienced business mentors around the clock. This means you can get advice to help you deal with all kinds of problems facing businesses, including solving disputes and debt recovery. Click the link above for details of our locations.