One of the biggest problems for small businesses up and down the country is late payment of invoices, which causes serious disruptions to cash flow.
A study by Barclays earlier this year revealed that 85 per cent of small and medium-sized enterprises (SMEs) in the UK have had a late payment problem in the last two years. Some 47 per cent of respondents said the worst offenders pay their invoices late three or more times a year.
Research from Bacs last September revealed that £36 billion is owed to Britain’s SMEs, with the average debt standing at £36,000.
When cash flow is interrupted by a late payment it can cause serious problems, with a third of SMEs having to use personal cash reserves to alleviate any problems that may arise. A worrying tenth of respondents said that late payment almost caused their operation to collapse. The survey by Bacs found that for a third of SMEs, £20,000 would be a large enough late payment debt to put them out of business.
“Minimising late payments and effectively managing cash flow is crucial for the survival, as well as the growth of small businesses,” said Sue Hayes, managing director of Barclays Business banking.
Knowing how to tackle late payment problems is, therefore, integral for start-up businesses that may have to deal with troublesome clients.
Do the admin
By setting out precise payment terms, businesses may feel more obliged to ensure they pay a business on time. It is not sufficient to just assume that an invoice will be paid promptly. The terms should be written down and signed in agreement, while also making sure that their order form does not say anything different.
Making sure invoices are very clear, simple and accurate will also help, as this can avoid any dispute that could be used as an excuse to delay payment. It may be advisable to set out penalties for missed deadlines. Some businesses even offer a discount to those that pay on time.
Once a payment is late, it is important to chase the customer down, John Judge, the managing director of Judge 3D, told SmallBusiness.co.uk.
An informal conversation should be the first port of call to find out exactly why the deadline has been missed. He recommends that for a 30-day invoice, businesses should speak to customers after 20 to 25 days to make sure that everything is okay and that it will go through on time, while perhaps outlining the penalties for late payment.
Know how to deal with excuses
Companies may offer a variety of excuses for late payment, so it is important to know how to address the ones that most commonly crop up, the website Payontime.co.uk explained.
If they say the cheque is in the post, ask them for the cheque and postage details for confirmation. Without actually sending the payment, they will not be able to answer.
Businesses commonly say that the person who signs the cheque is on holiday, particularly in the summer and around public holidays. Respond to this by asking what provisions are in place for signing salary cheques and other payments. Question them why a signed cheque has not been left behind and stress the importance of the payment being received on time.
If a business says it has lost the invoice and wants another one to be posted, offer to fax it over immediately for payment straight away. If they do not, then their excuse is likely just a strategy to delay.
Legal action should be a last resort, as it may end any relationship with the client. However, it may be a necessary path to take.
A low-cost legal technique is to make a money claim online, with papers sent from the court to recover debt and all process tracked online. It is minimal hassle but it does not always work as if bailiffs have to be called, a small company may have few assets to take.
Another method is a winding-up order, which seeks to close the debtor’s operation if they do not pay. This is trickier as it requires a solicitor with documentation relied upon in court.
Before reaching this stage, it may be advisable to threaten a company with negative publicity. It will still end any working relationship with the company but the negative public portrayal may scare them into paying very quickly.