Business Law & Compliance

How to tackle pesky late payments in six steps

7 min read

05 November 2015

Despite 2013 legislation stating that debtors not paying within 60 days will be forced to pay interest and reimburse reasonable recovery costs, around 85 per cent of SMEs are affected by late payments. As such, we took a look at six ways SME owners could avoid being owed money by consumers.

Late payments can quickly damage a company’s cashflow and can often force bosses to use expensive overdrafts or become late payers themselves. It is not a new issue but the problem has worsened since the financial crisis of 2009 – and particularly affects SMEs. Between 2008 and 2012, the overall level of late payments due to these businesses almost doubled from £18.6bn to £35.3bn – with experts expecting this number to increase to £50bn in 2015.

Analysis of nearly 6,000 invoices by MarketInvoice with blue chip debtors found that 56 per cent of SMEs are paid late. Of those invoices, on average the payment was made 17 days beyond the contracted terms, and nearly one in ten was paid more than 30 days late.

It was with the intention of tackling the problem that the Enterprise Bill was announced in the Queen’s Speech. This included pointing small companies whose clients fail to pay on time towards mediation services to settle the dispute without the need for court action.

However, it wouldn’t hurt to know how to tackle those pesky late payments on your own – so here are a few tips.

(1) Always do a credit check

According to Emily Coltman, chief accountant at FreeAgent, despite being one of the most obvious basics, many companies forget to look into the financial circumstances of those they are doing work for.

Of course, checking everyone could cost quite a lot of money, but some may feel that the benefits of being 100 per cent sure that consumers can pay outweighs the initial price.

“If the price of your work is high, or if you’re selling a large amount to one customer, you may want to carry out a credit check in order to feel secure they are actually able to pay you,” she said. “If they turn out to be a new business with a limited credit history, you may decide that it’s too much of a risk.”

(2) Remember your smaller suppliers

Although late payments are something almost every business comes across, in the UK there is currently a culture of unpaid payment causing a domino-effect of debt across the nation.

Many small business owners end up struggling to keep their own companies solvent at the expense of paying their suppliers on time, and one in five businesses end up reliant on bank overdrafts as a direct result, claimed Sage’s European president Brendan Flattery.

Read more about late payments:

(3) Simplifying cashflow with updated software

You may have large reserves of cashflow allowing you to wait a bit longer for a payment but this will soon be eaten into if too many customers drag their feet. Greg Ford, managing director of Advanced Exchequer, explained that it is crucial to business success to forecast 12 months ahead.

This, Ford claimed, was where technology came into play. He said that finance departments of large corporations often made use of old technology, or even paper – which gave bosses an unnecessary hoop to jump through.

“Implementing a simple credit control process does not need to be complicated and can ensure payment is on time, every time,” he said. “A structured approach that sets out a day-by-day strategy can help reduce the threat of late payment.”

(4) Start a relationship with those paying you

An article by Amy Anderson in Forbes suggested people ultimately choose to do business with people they like, and everyone likes someone who appreciates them.

She said: “I once read a quote by the ever so brilliant writer known as Anonymous. It stated, ‘People will forget what you said. People will forget what you did. But people will never forget how you made them feel.’ The most powerful tool you have in creating success in your life is to appreciate other people.”

When it comes to tackling late payments, the finance director will be the bridge between you and the companies you supply. As such, communication is vital, and having a direct line and healthy relationship could make all the difference.

(5) Charge interest if a payment is overdue

In a bid to encourage prompt payment among UK businesses, the law now deters customers from paying late by allowing you to charge debtors interest on late payments, if you wish. According to the new procedures put in place by the government, the statutory interest is eight per cent plus the Bank of England base rate – currently 0.5 per cent.

For example, this would mean £85 annually on £1,000 owed. This figure could then be divided by 365 in order to charge the interest on a daily basis for each day it is late.

(6) Taking legal action should be a last resort

“Our research found that 64 per cent of the businesses suffer from late payments, with one in 25 facing shortfalls of more than £50,000 every year,” said Tristan Duncan, partner and head of dispute resolution at MLP Law. “Strict credit limits should be set for each customer to ensure that they do not accumulate too much credit at any one time. But we also found very few are actually seeking legal advice as they fear it would cost too much or they didn’t have time.”

Indeed, while taking someone to court is an important weapon in your armoury, it could also cost you a hefty sum. Instead, the threat of legalities could push someone to pay just as easily.

The key to solving your late payment woes, however, is to always deal with the problem fast, accurately and politely.