The legislation was originally due to be implemented in the UK on 1 November 2002 but has been brought forward in line with an EC Directive.
It is the third and final phase of a late payments law – The Late Payments of Commercial Debts (Interest) Act 1998 – which currently allows small businesses to claim interest on overdue bills from similar-sized and larger businesses.
As of 8 August, however, the law will apply to businesses of all sizes, meaning that any company can claim interest from any company that has debts outstanding, regardless of size. In addition, companies will be able to claw back administration costs involved in recovering debt.
This extension of the act was implemented due to the EC’s recognition that, “Heavy administrative and financial burdens are placed on businesses, particularly small and medium-sized ones, as a result of excessive payment periods and late payment.”
The positive effects of the bill are already being felt amongst small businesses. An ongoing survey by the Credit Management Research Centre (CMRC) revealed that in December 2001, firms with under £1m turnover were reporting “a significant decline” in late payments, with the average waiting time dropping from 25 to 19 days in the previous six months.
Dave Harrop of the Forum of Private Businesses says that businesses are beginning to experience the benefits of the new law, largely due to the increase in cash flow. Previously a late payment would have “a knock-on effect,” generating “a vicious circle” of late payments, but cash is “now circulating more quickly.” However, he warns that it would take “three or four years to kick in” properly, citing the examples of countries like Norway and Denmark, where it has been established for several years.
The CMRC survey also indicated that more small businesses were becoming increasingly aware of the importance of setting up formal payment procedures. 49% of small companies had written sales agreements in 1996, but this had risen to 61% by 2001. There was also a dramatic rise in the number of small companies having written credit policies – 26% in 1996, compared to 43% in 2001.