Cash flow is the lifeblood of any business and often marks the difference between success and failure. It is not uncommon for customers to persistently pay late for goods and services, sometimes two or three months after an invoice falls due. When your business is dependent on orders, it can be difficult to challenge this habit through fear of biting the hand that feeds you.
Late payment is a major concern for any business, whether large or small. As cash flow stagnates, so too does productivity and growth. The average late payment burden for Small Medium Enterprises (SMEs), employing 250 people or less, currently stands at a crippling £31,901 per business. The ripple effect of late payment includes reliance on overdrafts to make ends meet and difficulty paying staff and regular bills. In turn it creates a vicious cycle on the supply chain, as it forces businesses to pay their own suppliers late.
Proposal for Change
The Government has announced plans to introduce a ‘Small Business Commissioner’ aimed at tackling the £32.4 billion deficit currently owed to SMEs across the UK. The proposal forms part of wider reforms aimed to improve access to finance for businesses and individuals under the Small Business, Enterprise and Employment Act 2015.
The Minister for Small Business, Anna Soubry, calls for a culture change in how businesses resolve disputes arising from late payment. The Commissioner will provide general information and advice through social media and telephone, whilst offering a mediation and conciliation service as an alternative to court proceedings. The Commissioner will also have a ‘complaint handling function’ to look into referrals made by small businesses against medium-large sized businesses. In a bid to increase transparency, the UK’s largest companies will be required to report on their payment policies with a view to ‘name and shame’ poor performers.
Whilst the plans are encouraging, it is difficult to see how they will address the current imbalance of power and potential for supply chain bullying. If your business is a small fish in a big pond, it could be difficult to make a referral to the Commissioner whilst trying to maintain a working relationship. This is particularly so for businesses who are reliant on a small number of large buyers. It will be interesting to see whether the conciliation service is an effective alternative to issuing costly court proceedings.
Five Top Tips to Deal with Late Payment
Although late payments cannot be avoided, the risk can be reduced by taking the following steps:
- Do your homework before offering credit. Online resources are available to check the solvency of a company or individual and will help to flag any concerns. It may also be worthwhile to subscribe to a credit reference agency who can conduct a more thorough background search on your behalf.
- Set a clear credit limit and time limit for payment. Depending on the customer, it may be appropriate to set a conservative limit as a starting point which can be extended if necessary. Carry out a forecast to see how payment terms affect your cash flow and set limits accordingly.
- Encourage payment up-front. Some customers may be willing to pay up-front or early, particularly if an incentive is offered such as a discounted rate. This may not be suitable for all customers but it is certainly worth offering them the option.
- Keep on top of late payments. A polite prompt that the account is overdue acts as a useful reminder to the customer and shows organisation on your part. Keep a record of the date on which the reminder was sent and have a policy in place for chasing payment with a letter to be sent on the 14th day, 28th day… and so on.
- Make it clear that interest will be claimed on late payment in accordance with your Terms of Business. We can help with these if you do not have any or if they need reviewing. If the customer is a company rather than an individual, statutory interest can be claimed at 8% above the Bank of England base rate (currently 0.5%). Statutory compensation of up to £100 (depending on the size of the debt) can also be claimed on every overdue invoice.
For more information regarding keeping on top of late payments or any other business recovery issues please contact Richard Thomas head of Business Recovery on 01244 354801 or firstname.lastname@example.org