How to deal with the pain of late payments: Tips for small businesses

/ Posted By - Bradleys Accountants / Categories - Advice for Small Businesses

A few days ago, new data from FSB looked at how late payments were hurting a small business’s profitability. The survey of more than 8000 SME member companies found that more than 50% were paid after the agreed date by large companies in 2013. The impact has been seen as detrimental to a business with 34% reporting reduced profitability, 32% saying it resulted in paying their own suppliers late and most worryingly 29% felt it was stunting business growth.

Last year, BACS – the organisation behind Direct Debits, revealed that some of the UK’s largest companies owed a collective debt of £30.2 billion to small companies, with 1 in 10 small companies owing a staggering £50,000 or more in late payments. While acknowledging the scale of the problem, we realise that small companies typically face extra cost when they don’t get paid on time – things like extending a bank loan/overdraft, lending interest free to large firms and additional borrowing among other things.

Since the nuisance of late payment is both morally and commercially wrong, we’ve listed a few plans that could help you keep your end of the bargain:

1. Sign contracts

We advocate that all work should be underpinned by a contract signed by both parties. It’s not only the safest way to protect work that your small business does, but also helps you chase payments if they are not paid within the stipulated time if you set payment terms in the contract.

2. Set up payment terms

It’s a given that payment terms are based on relationships and age old convention. However, establishing terms of invoicing and talking about it early on in the relationship will keep you on the safe side. Don’t rely on spoken agreements and ensure to include timeframes, cost associated with late payments and acceptable payment methods when taking on new customers. It’s also advisable to include these terms consistently on each invoice. Penalties for late payment can range from a small fine to interest for all late payments. More information on contracts can be found on the Prompt Payment Code website.

In a situation where a client does finally pay up after being late by months, it’s suggested you put them in the ‘unreliable payers’ list and in a professional and friendly way dictate new terms. Maybe you could even ask them for a 50% deposit for all the work before it begins. That should keep them in check. Just make sure that you put this in writing and clarify that since your business relies on cash-flow this is the only way you work.

3. Don’t delay invoices

It’s obvious that if you invoice late, you extend the period when your clients owe you money. To steer clear of this, ensure they raise a purchase order before you supply goods or services.

Importantly, send an accurate and timely invoice with the required details within a week after the work is finished. In case of large invoices call your client before payment is due and ensure they’ve received the invoice and have no queries. It’s hard to believe but it’s a fact that if you invoice promptly you will get paid quickly. So drop everything and send that invoice.

4. Charge interest

Not many know that the government has drafted legislation to protect small businesses against late payers. So if you are unsure about what payment terms to set, have a look at Gov.uk’s useful article on Late Commercial Payments. It details ‘statutory’ interest you can charge if a client pays late, which is 8% plus the Bank of England base rate, currently 0.5%. This means the statutory interest for a recent debt would be 8.5%. But make sure clients are warned that you may charge interest if payments are late.

Some more legislation come into force in March 2013, which says that that private businesses must pay within 60 days and public sector clients within 30 days.

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    5. Run credit checks

    Even when payment terms are agreed beforehand, late payments will still occur. As mentioned earlier, 50% of small businesses have been paid late in the last 12 months. So make it a policy to run background checks on new clients and ones that seem to be paying late on a regular basis – there are several sites online that provide this information. Credit checks will help you find out if your clients have been reliable with other suppliers. If not, is there a valid reason for doing so? And if you still decide to take them on be clear about your payment terms right at the start.

    6. Chase invoices

    What this means is you will be looking at a minimum fine of £1,600 if HMRC fails to see your tax return within a year. Penalties are not the best way to spend your hard-earned cash. We think it’s better to pour yourself a cup of coffee and get started.

    7. Employ a debt recovery agency

    It’s unfair that 53% of small business owners spend between one and 6 hours each week chasing late payments. If you can’t face the task of chasing, employ a debt recovery agency, small business accountant or a solicitor to act for you. Not only will they ensure that invoices, letters and statements are sent on time but also reach conclusions on the extent your business can offer credit. Sometimes hiring a professional to chase for you adds more authority to your business and gets clients paying faster. However it should be used as a last resort as nobody likes to receive a debt collection call.

    8. Make it easy for them to pay

    Automating payments can make a big difference in controlling your business’s cash flow. Encourage clients to pay using direct debit. Other than reducing the number of man hours, introducing automated payments will save cost, increase cash flow and allow you to make forecasts accurately. But for businesses where direct debits are not appropriate, allow customers to make payments in as many ways as possible – credit cards, bank transfer, debit card, Pay Pal and cash. And if you accept cheques, just make sure your bank details are extremely clear on all invoices.

    9. Sound a call to arms

    It’s a known fact that one small business doesn’t have the power to take on a large corporation. But collectively they do. Given that big businesses are well versed in delaying payment tactics, join other small businesses to call for a regulator or third party platform to deal with late payments. Unless big businesses are named and shamed they will continue to cause difficulties for small businesses.

    10. Talk to customers

    It’s important that you talk to your clients because some of them might have genuine reasons for holding up a payment. Try not to jump to conclusions, just pick up the phone with an open mind and have a discussion about why they failed to pay on time. Explain to your clients that it is part of service.

    The guideline adds, “When we have the space, we tell a passionate coffee story. But even with just a few words, our copy can make you smile.”

    Similarly, Starbucks recently rebranded its logo to the simple Siren logo without the “Starbucks Coffee” wordmark wrapped around it. The company notes, “The preferred approach is to use the Siren logo by itself, unlocked from the wordmark. This allows flexibility to present the Siren with greater prominence while maintaining a considered, open and modern presentation.”

    Ultimately, this most recent Starbucks rebrand is simple and effective. Rather than moving too far in the opposite direction of the brand’s roots, the company sticks to its fundamental company vision while making slight alterations to continue serving the needs and preferences of its consumers.

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