An empirical study of the effects of regulatory systems on the collection of late payment of commercial debts owed to micro and small businesses in the UK

Abstract

Trust is the foundation of trade credit. Failure to pay on time affects the supplier’s business, causing stress and potential bankruptcy. Small businesses employ formal (solicitors, debt collectors, statutory demands) and informal (discounts, extended payment terms, violence) techniques to enforce payment. The Government has enacted measures requiring larger buyers to report their payment practices and has given businesses the right to claim interest, yet businesses are either unaware or do not use these provisions. The research phase of this thesis was conducted in 2018/19 and incorporated an initial survey with 74 respondents followed by a second survey with 250 respondents. During the period, 20 in-depth interviews were undertaken to gain a deeper insight into specific points. This research finds that small businesses do not conduct sufficient due diligence, selling to anyone and hoping buyers will pay while relying on law to ensure payment. The effects of late payment resulted in 81% of respondents saying they had experienced increased stress which permeated outside the workplace. Furthermore, the findings revealed that at the micro and small business level respondents considered the emotional effect of late payment to be greater than the monetary impact on the business. Large businesses reported the temporal effect to be of greater concern than the monetary impact. Faced with a late payment, 44% of respondents considered escalating collection processes, and a third commenced litigation. Interviewees considered the current legal system expensive and unworkable. Litigation was however used as a method of restoring communication with a defaulting buyer to obtain (partial) settlement as opposed to gaining judgement and restitution. This thesis widens the debate on late payment from a purely quantitative monetary business problem to incorporate the qualitative impact on human assets.