THE Government does not understand how small businesses work, according to the country's largest and oldest Chamber of Commerce.

The Birmingham Chamber of Commerce and Industry (BCI) has said a new Government initiative aimed at helping to combat late payment of bills may be misguided.

According to the 200-year-old chamber's research, small businesses are wary of the new measures, which say firms owed money will be able to claim up to £100 in debt recovery costs for every overdue bill. This is on top of claiming interest on the amount owed.

Currently late-payment is a problem that costs small and medium employers nearly £7bn, with 10,000 UK businesses failing each year as a consequence.

Although it is cautiously welcoming measures to assist small firms in obtaining money owed, the chamber fears they may damage the relationships between buyer and supplier.

"The Government doesn't seem to realise how business works, especially small businesses," said Louise Beard, policy director at BCI.

"Experience has shown that firms are reluctant to risk working relationships by using this kind of leverage to get a customer to pay a bill.

"I don't even think it will act as a deterrent because firms may just take their business elsewhere rather than pay the penalty."