Is your Small Business Credit Aware?
OFFERING CREDIT TO YOUR CLIENTS AND CUSTOMERS
Offering payment terms to your clients/customers, your buyers, can be an effective sales technique. If, for example, you have a service package or products priced at £2,500, it’s likely to be an easier sale if you allow buyers payment options, giving a buyer time to pay, rather than them having to pay the £2,500 in one upfront lump sum.
The problem is that this is a legal minefield and you can inadvertently find yourself in the realms of a regulated credit agreement which means that you need to be registered and regulated by the Financial Conduct Authority unless you belong to a profession (such as accountancy) where your professional body deals with it. If you offer credit regulated credit and you are not registered, you may be committing a criminal offence.
What are the problems?
Generally, in the UK consumers have more legal rights than businesses when they buy something and certainly, most credit and payment protection is aimed at protecting consumers. For example, if you are offering a consumer a product or service on credit then they must be given specific information and generally have to be given a cooling off period to allow them to change their mind without incurring any penalties.
Under the current legal definition, you are a consumer if you are an individual entering into an agreement /contract for a purpose which is not a trade, business or profession. So there can be a potential problem if you are selling to buyers who appear to be businesses but then, (and it’s usually when they have an issue, like a problem paying you), they claim to be a consumer, because they have more rights.
So, for example, as a VA you may be asked to create a Spreadsheet, or type something up by someone who you think is a business client, but you may not know for sure. This type of situation can be really tricky when you’ve got a sole trader who appears to trade using their own name as a business or someone in the very early stages of a business who is buying things personally.
(2) Business Exclusions
You might think that if you are dealing with another business and they are buying for a purpose which is clearly for a trade, business or profession you don’t have to worry about offering credit. Unfortunately, this is not true if your business buyer is one of the following:
- a sole trader
- a partnership which has less than 4 partners and at least one of those is an individual
- an unincorporated association
The law gives this type of smaller business, consumer style protection when it comes to credit agreements.
(3) Broad definition of what is a Credit Agreement
There legal definition of what a Credit Agreement is includes the usual types of loan and credit agreements that you would expect. The problem is that what the law recognises as a credit agreement is much broader than that because it will also include
- any type of agreement where a business seller supplies services or products,
- but payment is deferred, or credit provided,
- whether or not any interest is charged.
So, for example, if you only wanted to give your buyer 18 months to pay and don’t want to charge any extra to do this, it could be a problem because it is likely to be a regulated credit agreement which means that you must be registered and regulated by the Financial Conduct Authority
(4) Payment Surcharge
If you allow buyers to pay using certain methods, for example, by credit card, it may mean that you end up paying handling and transaction fees to your bank or payment provider. So, using our example again, instead of your payment of £2,500 for those services or products, you only get £2450 after those charges have been deducted. You may think therefore that it’s fair to pass on those charges to your buyers in return for the convenience of paying how they want to. Until January 2018 this was OK. For example, Ryanair used to charge 2% on top of the flight price if you used your credit card to pay.
However since January 2018, you can no longer charge consumers buying goods and services any extra (a surcharge) to pay you by credit or debit card. This
- includes any methods which are linked to your cards, such as Apple Pay, Android Pay or PayPal
- applies to UK businesses selling to UK consumers
- applies both in-store and online purchases
- will apply after Brexit because it is already part of UK law – Consumer Rights (Payment Surcharges) Regulations 2012 (amended by the Payment Services Regulations 2017).
Some businesses have worked around this by
- Increasing what they charge to include the cost of what they are selling – so, in our example, they would charge £2550 to include the £50 charges they incur with their payment provider (but the same price is charged for those paying by other methods) or
- Charging a Service Fee. For example, Just Eat used to charge 50p for using a card but then changed this to a “Service Fee” of 50p. If you are thinking of doing this, you can’t do it if you are offering instalment options, as we’ll discuss shortly, and you should think carefully about what you are going to do and take some advice before taking any action.
(5) Credit Introductions
You may think that you can solve this problem by introducing your buyer to another business which offers credit so that the credit agreement is between that business and your buyer. It may appear doing it that way means you are not offering any type of credit yourself. Unfortunately, it’s not that simple because this kind of introduction arrangement is credit brokering and again, you must be registered and regulated by the Financial Conduct Authority.
Is it possible to offer payment options if you can’t or don’t want to be registered and regulated by the Financial Conduct Authority?
The most straightforward way is to offer a payment instalment option, but you need to follow some rules. You can usually have a client pay by instalments provided that
- It is for a fixed amount. So, using our example, the instalment payments are for a fixed amount of £2,500
- There are 12 or less payments over a 12-month period (until March 2015 it was 4 or less) and
- You don’t charge any interest or charges (except for default charges if payment is not made on time etc). So, for example, you can’t charge an admin or service fee.
- It’s for specific Services and/or Products (except for agreements for land, conditional sales, HP, pawn)
- You include this option as part of your agreement (terms) with your buyer, so it’s clear that it is NOT a regulated credit agreement
Prompt Payment Discount
You could also consider having a Prompt Payment Discount. This is where you offer the buyer a discount if they pay more quickly. So, using our example, if you have a service package which costs £2,500, you could offer a Prompt Payment Discount. However, you do have to handle this carefully because you don’t want to be perceived as simply disguising credit charges if you are also offering an instalment option to your buyers.
If you want to offer a Prompt Payment Discount, you should
- Make sure you clearly refer to the cheaper price or discount as a Prompt Payment Discount (use those words to match the legislation)
- Specify the terms of that Prompt Payment Discount on the invoice. So, for example provide the buyer with an invoice for £2,500 and offer a Prompt Payment Discount of 5% or £125 provided that the buyer pays within 7 days of the date of the invoice
- You include this option as part of your agreement (terms) with your buyer, so it’s clear that it is NOT a way of disguising the fact that your business is offering any type of credit agreement
- Account for any applicable VAT on the actual amount that your buyer pays
Whilst offering payment options can be a sales incentive and can work in your favour just make sure that you do it properly because the last thing you want is someone complaining that you’re offering regulated credit agreements without a licence. When everything is running smoothly it’s something you may not consider but when often, when a dispute arises, those who want to dodge making a payment will seek out ways to show you are in the wrong.
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