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SMEs urged to tackle problem of late payment

Too many smaller firms are failing to safeguard themselves against the problems posed by late payments.

According to the Law Society, SMEs are having to wait an average of 41 days longer than the time agreed with customers before receiving payments.

Some £24 billion is owed to SMEs at any one time, and recent research has shown that 37 per cent of late payers take between one and three months to settle invoices.

With the increase in VAT to 20 per cent expected to exacerbate cash flow issues, the Law Society is urging small businesses to guard against late payment.

Robert Heslett, the Law Society's president, said: "Average commercial debts caused by late payments are high in the UK, and for SMEs a lack of cash flow can be crippling. With credit less available to those businesses from banks, late payments have a far more serious consequence for SMEs.

"Considering the amount of red tape SMEs and start-ups are faced with, it is no surprise that seeking protection against late payment from customers does not come top of the to-do list. However, it could be the difference between the business surviving or not, especially in the uncertain economic climate."

Mr Helsett urged businesses facing chronic late payments to consider drawing up a carefully worded contract between themselves and their commercial customers which includes clear terms on late payments.

These might refer to penalty clauses and strict time frames for payment.

The EU is currently examining the possibility of updating a directive aimed at tackling late payments.

But Mr Heslett added: "Many smaller businesses perhaps felt the recent Budget did not do enough to tackle cash flow problems head on, and although the EU is looking at it, the safest bet is to protect against cash flow blockage between the customer and the business with a solid contract."