Lack of interest aids late payers

THE INSTITUTE of Directors has joined the chorus of organisations calling for suppliers to have a legal right to charge interest on overdue bills.

'Although legislation alone would not solve the problem, a statutory right to interest on overdue debts would encourage firms to end the practice of habitual, planned, late payment for financial gain, and ease the cash-flow problems of suppliers and small firms in particular,' said Ann Robinson, head of policy at the IoD.

The institute was responding to a consultation paper issued last November by the Department of Trade and Industry, asking for suggestions on how to reduce late payment.

The DTI floated the possibility of a statutory right to charge interest, or the creation of a British Standard on prompt payment. The closing date for submissions is next Thursday, when the CBI will reveal its views. It is expected to repeat that legislation would not be helpful. The CBI's Smaller Firms Council takes the same line, even though legislation would be intended to protect small businesses from exploitation by large customers.

Representations from other bodies have already cast doubt on whether small firms would benefit. The Institute of Credit Management argued that imposing interest on late bills would severely damage trading relations and would in most circumstances be impractical. 'If legislation were introduced, small companies would not use it,' the ICM argued.

It is also most often a case of small firms paying other small firms late, the ICM suggested. It added that their managements need to be trained to collect debt more efficiently.

Only larger companies would have the resources to require debtors to pay interest, and only they would be immune from the trade repercussions of doing so, said the ICM. The result could be an increase in the number of small businesses going to the wall.

The Chartered Institute of Management Accountants also argues that the problem is not so much wilful non-payment by large companies, as weak management in small firms. 'Small firms often don't put terms of payment on invoices,' said Roger Gray, director of public affairs at CIMA.

Small firms should consider attracting skilled managers from outside as non-executive directors, suggests CIMA. 'The Cadbury report says that big companies should have non-executive directors in a watchdog role,' observed Mr Gray. 'We have said to small companies, 'don't just think of them in this context, but as a good source of advice'.'

The CIMA believes that legislation should be considered only as a last resort. Initially, companies should be asked to adopt a code of best practice, which in time becomes an enforceable minimum standard.

Professor Colin New of Cranfield School of Management, writing this month in the Independent, suggested another solution. 'All that is required is to allow input VAT to be reclaimed only on invoices paid within, say, 30 days of the invoice date,' he wrote.

This would clearly have its attractions, but it could make company audits more complicated and expensive.

One justification for a right to charge interest on overdue bills is that it has proved effective elsewhere, namely in most EU member states, which do have such a provision. This is disputed by the ICM, which argues that late payment is a worsening problem across the EU.

The DTI points to reports that businesses are paying sooner as they move out of recession. But no one seriously believes that doing nothing will solve the problem.