UK Late Payment Legislation - No Hard Evidence Of Improvement

12th October 2006

Late payment still higher than seven years ago despite Government pledge

The latest Credit Professional Index (October) from the Institute of Credit Management (ICM) shows that Late Payment by UK companies is still higher than seven years ago - despite a range of Government measures including the introduction of the Late Payment of Commercial Debts (Interest) Act in November 1998.

The latest research, undertaken for The ICM by the Credit Management Research Centre (CMRC) at Leeds University Business School, is based on company activity in Quarter 2 of 2006 (April-June) and shows that the number of days overdue stands at 17 days on average. The lowest point of 16 days overdue, recorded in April-June 1999, has not been reached during the last seven years.

The Act - along with various Government interventions - was specifically introduced to tackle the domestic late payment culture in the UK. Further findings show that the overdue time for UK firms being paid from customers' overseas has significantly risen during the same period from a low of 13 days in late 1999 to 21 days in mid 2006. This is despite further amended European Late Payment Legislation introduced in 2002 aimed at improving the payment culture among the wider European community.

In terms of recent trends, The ICM's key Credit Professional Indicator on late payment shows a fall in levels of confidence among the UK business community in recent quarters. The Late Payment indicator now stands at 40, a fall of two percentage points since the same time last year.

The findings are taken from the CMRC's October Credit Management Quarterly Review, a regular programme to monitor the impact of the Legislation. Commenting on the results, Philip King, Director General of the ICM said: "Legislation is but one weapon in the credit manager's armoury and it isn't being widely used. Good credit management is not universally applied, but where it is, and the best-practice advocated by the Institute is enforced, the results speak for themselves.

"What is clear from these results is that smaller companies still fear losing the business of a larger customer if they take a tough stance on late payment. That is why they are not taking advantage of the Government's Late Payment legislation, even in cases where they are clearly being exploited. What they need to understand is that by acting responsibly, and by having a robust, professional credit management strategy, they will actually earn the respect of their larger customers and be negotiating from a position of strength."

The Credit Professional Index also shows evidence of a key difference in the net trade credit position among Small to Medium Enterprises (SME's) and large companies. The net trade credit position in the October survey shows an SME net position of (+) 3.9 days compared with a large company net position of (-) 5.1 days. This means that large firms are currently receiving more credit than they are extending and SME's are being forced to extend more credit then they are receiving.

"This clear imbalance in the net position could be evidence that large firms use their dominant position to access large flows of trade credit at the expense of the Small firm," Mr King suggests. "If this trend continues then it will further stretch the abilities of smaller businesses to manage short term finance and working capital. The Late Payment Legislation had a key remit of bridging the payment differences experienced by smaller and larger businesses but these figures show that clear differences still exist."

Professor Nick Wilson, Director of CMRC adds: "The figures produced for the ICM show that the net credit position of UK business clearly fluctuates according to the economic cycle and we see signs of smaller companies being stretched by both suppliers and customers."

www.cmrc.co.uk