If you’re a small business, this might sound like an all too familiar situation:
Your work for a client has been completed, the invoice issued and the due date for payment passed. You’ve politely chased and now the waiting game begins…
Polite, enquiring emails become stern calls to the client’s accounts department, coupled with a rising sense of worry, and with good reason. Late payments can have a critical impact on an SME’s cashflow.
A recent study by MarketFinance shows that the length of time businesses are kept waiting for payment beyond their agreed terms doubled in 2019.
Late payments are a persistent headache for small business owners, with industries such as professional services and manufacturing suffering from as many as seven in ten (70%) invoices being paid late. This not only causes problems with short term cashflow, but often has a knock-on impact further down the supply chain, preventing businesses from taking new orders, hampering business growth and in some cases causing the business to fail.
The late payment crisis has been on the Government’s agenda for some time, with the Chancellor of the Exchequer last spring announcing that new measures would be put in place to help tackle the unnecessary pressure the UK’s small businesses find themselves under. The Prompt Payment Code, where some of the UK’s largest suppliers pledged to pay 95% of invoices within 60 days and work towards 30 days as the norm, has helped to raise awareness of the problem, but it would be wise to look at how you can take proactive steps to protect your business.
How can I avoid late payments happening in the first place?
Do your homework before you begin working with a new client or customer. Doing some research into a new client’s credit rating via a credit reporting company such Experian won’t cost much and will give you a good idea of how the company manages their cashflow and whether they have defaulted in the past. You can also carry out some basic checks into the background of a company via the information held by Companies House.
The reason suppliers pay late is often as simple as the need to preserve their own cashflow, so if you have concerns, you could consider offering early payment discounts as an incentive, or suggest an upfront deposit before work begins. Get to know your individual clients and how they operate – maybe they need to raise a PO number before you can invoice, or there might just be one person responsible for signing off the invoices who doesn’t know you exist.
Ultimately, as a busy business owner you don’t have time to waste chasing payments, so where possible try to build relationships with companies you can trust and who share your values and understand the reasons you need to stand by your terms of business.
Late payments are unethical and having honest, frank conversations with vendors should encourage a collaborative culture between customer and supplier that supports business growth.
It’s already happened, what shall I do?
By removing all possible obstacles to payment, you can avoid classic excuses like:
“Cheque’s in the post”
“We didn’t receive your invoice!”
Consider using (if you don’t already) alternative methods of invoicing and receiving payment – such as online payment systems - in order to track the safe delivery and receipt of your invoices and give your clients greater flexibility in how they make payments.
Assuming you’ve exhausted all other options, it’s worth remembering that all businesses in the UK have a statutory right to charge interest on late payments, so if the contract doesn’t specify it, this is the Bank of England base rate plus 8 per cent. Preparing a late payment reminder letter, stating that there will be additional interest charged if the invoice remains unpaid, can sometimes be enough to prompt payment.
Working with your accountant to prepare monthly management accounts means you will be able to spot any holes in your cashflow created by a late payment ahead of time and work together to mitigate the impact by devising a contingency plan.
How can I recover the money?
If all else fails and months have passed, you can make a court claim, seek help from the FSB Debt Recovery service and gain advice from the Prompt Payment Code’s Compliance Board.
“We want the UK to be the best place in the world to start and grow a business, but the UK’s small-to-medium-sized businesses are hampered by overdue payments. Such unfair payment practices impact a business’ ability to invest in growth and have no place in an economy that works for everyone.” MarketFinance’s external relations director, Bilal Mahmood
Get in touch for a free initial discussion about how we can work with you to reduce the impact of late payments on your business, or find out more about how to improve your credit control processes here.