Late payments are nothing new for small businesses, sadly. And the latest research shows that the UK’s SMEs are owed on average £42,000 in overdue invoices.
The CEBR findings – based on 1.2 million invoices – reveals that the figure has increased for three consecutive years. It also states that 44% of invoices were paid late. In total, a staggering £112 billion is locked up in late payments that should be circulating through the economy.
As a result of these worrying figures revealed earlier in the summer, the government has now announced a tough crackdown on late payments.
According to a government notice in recent weeks, they plan to make new late payment laws the toughest in the G7. These include:
- Reducing the current maximum payment terms of 60 days to 45.
- Giving a Small Business Commissioner new powers to carry out spot checks and enforce a 30-day invoice verification to speed up resolutions to disputes.
- Allowing the Commissioner to wield big fines to the biggest firms who constantly pay suppliers late.
How late payments can affect business goals
Whether the new laws really will make a difference will remain to be seen. But it’s clear that late payments are a big concern for business owners.
It is important in business to be able to plan ahead. Cash flow planning is essential to meet your business and personal goals. And if the money doesn’t flow in, then you can struggle to keep up with what’s flowing out.
Of course, you can always delay payments if your inflows are an issue. But that is often difficult for small businesses who rely on good customer/client relationships.
As a result, late payments can affect your business goals – both financial and personal. Business owners and directors can end up spending time they planned to put aside on fixing late payment issues rather than working on their business.
The wider impact of late payments
A recent research paper studied data from 11 EU countries from 2019-2023 to find out what challenges SMEs face from late payments. The economists found that the impact of late payments were far wider than simply cash flow. They discovered that accessing funding was also a problem due to late payments.
It says, “SMEs suffer the most from late payments because of their limited financial re-sources to mitigate the impact of late payments when they occur. Banks view late payments as a sign of heightened financial risk, as they signal potential cash flow problems and reduced liquidity, which increase the likelihood of default.”
The paper also points out the domino effect of late payments, particularly in the case of Carillion. The construction and facilities management firm imposed 120-day payment terms on many contractor companies. When it collapsed in 2018 with debts of £2 billion, many suppliers also failed as they were owed months of invoices and had paid for raw material costs as well as time and labour.
In light of this, the government has also promised to improve access to business finance for SMEs. Again, whether that will be helpful or not remains to be seen. But at least the government is beginning to see the difficulties directors and business owners are facing when it comes to late payment.
How to deal with late payments
The result of payments delays can ruin business goals. So it is essential that you ensure payments are made on time. But what can you do to make sure they are?
Research customers
Agreeing a deal with a new customer is exciting. But make sure the new client isn’t going to let you down when it comes to payments. Check out their credit history before agreeing those terms and limits. You can use Experian, Creditsafe or another credit check provider. Their data will let you know if there are any concerns as they outline payment history. It’s far better than entering an agreement only for the new client to be a bad payer.
Be clear about payment terms
When you agree payment terms, be clear. Follow up any contracts with a verbal understanding that payment terms are clearly defined. And always make sure your terms are on every invoice you issue.
Credit control
Credit control is important. Whether you have staff who undertake the role, or you do that yourself, be consistent, firm, resilient, organised and polite. If you’re not comfortable calling about late payments and haven’t any staff you can train, outsource the task. It’s worth it in the long run. If you use software, such as Xero, make sure it sends reminders.
Make a call
If you send a large invoice or the first one to a new client, always follow it up with a call. This way, you can make sure it has been received and there isn’t a query. This helps quicker payment as they will have confirmed receipt.
Don’t delay chasing
If you don’t chase the outstanding invoice the day after it was due, then you risk it falling down your customer’s queue. So, make that call on day 31! Or whatever day it became overdue!
Late payment interest
You have a right in law to claim interest on late payments at 8% over the Bank of England base rate. So, let your customers know you will claim that interest. They are more likely to pay on time if they know their costs might rise. You are also allowed to claim for compensation for debt recovery costs.
Be flexible
On larger outstanding amounts, you may be asked to be flexible with your payment terms. If that means regular instalments or splitting the bill into manageable chunks, it’s better than ending up with no payment at all. So, be flexible and understanding. Especially if it’s a customer who has just hit a bit of a bump in their own road.
How can we help?
If you would like to talk about managing your business finances to unlock your goals (whether financial or other business goals) contact our team today.
