How the Late Payments Directive can help manufacturers

How the Late Payments Directive can help manufacturers

The Late Payments Directive came into force on March 16th 2013, and sets out new rules on the actions that can be taken when work goes unpaid for.

It applies across all goods and services, with a small number of specific exceptions on, for example, public sector contracts.

You can also voluntarily override any of its provisions by stating alternative arrangements in your contracts with customers – meaning none of the new legislation is totally mandatory in the private sector.

What it should mean, however, is that unless alternatives are stated upfront, customers will have little ability to enforce 60-day or 90-day payment terms on you when you issue them an invoice with a 30-day deadline on it.

30-Day Payment Terms

Many manufacturers, particularly those who supply major contractors, face a wait of three months or more for payment on goods supplied.

Under the Late Payments Directive, all contracts are subject to a 30-day deadline for payment as standard, and if your customers want to work to different terms, they should notify you before the work is carried out.

You're still permitted to alter these terms by stating longer payment periods in your contracts, so you can continue to offer 90-day deadlines if you're happy to do so, in order to retain big clients.

Fighting Back

If you're not happy to offer terms of more than 30 days, and you have a problem with a non-paying customer, the new legislation makes it easier than ever to take the appropriate legal action to defend yourself against any loss of income.

On an invoice that is even one day overdue, you can add a fixed fee: £40 on orders up to £1,000, £70 on sums of £1,000-£10,000, and £100 on larger amounts.

You can also add statutory interest at 8% above the reference rate (the Bank of England base rate on the more recent of December 31st or June 30th).

At present, that would allow for interest to accrue on unpaid invoices at a rate of 8.5%, making prompt payments specifically more economically sensible for your customers.

Extra Charges

For the first time, if your client simply will not pay to the extent that you have to engage debt collectors, you can charge your customer for their fees.

You specifically are not allowed to profit from doing so – the amount you charge must be the real cost of chasing the debt, minus the three-tiered fixed fees described above, so that the total extra charges added to the invoice (excluding statutory interest) do not exceed the cost of taking enforcement action.

However, this could easily still amount to a percentage commission of around 15% on debts over £10,000, meaning your customer would face the £100 fixed fee, plus another £1,400 or more in charges.

Is it worth it?

As mentioned above and throughout this article, these rules are voluntary for the private sector: you are not legally obliged to chase overdue invoices, or to add the charges as outlined above.

You may wish to be more lenient with clients who are usually reliable, or who are worth large amounts of money to you on an ongoing basis.

When appropriate though, the Late Payments Directive gives clear and unambiguous guidance on when payments should be made, and on the potential cost to your customer of failing to pay promptly.

The Fair Payment Campaign

The BWF is determined that its members benefit from fair and transparent payment practices throughout the supply chain and have the right to receive full and correct payment as and when due. This is why we are supporters of The Fair Payment Campaign which has the objective of achieving proper and timely payment and eliminating cash retentions throughout the construction industry supply chain.