Late payments are the scourge of small businesses in the UK. Business owners often find themselves desperate for the money owed to them to ease their cash flow, yet unable to do anything about it for fear of damaging a potentially lucrative relationship with a client. We caught up with some small businesses to see how they tackle this issue.

More than half (53 per cent) of Britain’s SMEs are owed money from late payments, which totals an estimated £255bn. This is according to the latest Zurich SME Risk Index, which found that, of those businesses owed late payments, one in five (20 per cent) are owed more than £25,000 and almost one in ten (eight per cent) are owed more than £100,000.

This is a global problem, but whereas late payments have decreased in the rest of Europe, they have continued to rise significantly in the UK. By contrast, in Japan, Belgium, the Netherlands, Switzerland, Germany and Ireland, payments to UK-based companies are actually on average made early.

Japan’s record may be explained by its zero to negative interest rates. With no reason to save, Japanese companies have more incentive to pay promptly.

In addition, Carolyn Pearson, CEO of a global solutions provider for female travelers called Maiden Voyage, suggested that another reason for the global disparity is cultural: “It’s almost like a sport in the UK.”

According to Pearson, the corporate companies are “dream clients”. “The ones that I really struggle with are hotels,” she said. “I would probably say that 50 per cent of our hotels pay late.”

Pearson was so “incensed” by the issue of late payments that she wrote to David Cameron while he was prime minister. She insists that more solutions and tighter legislation are needed for small businesses, as many would be hesitant to take legal action currently made available to them by the government. Around half (49 per cent) of small businesses agree with Pearson, saying the government should be doing more to help SMEs in these circumstances.

“If you get to the point where you’re pushing someone with legal action, you’re going to damage that relationship. As a small business, you’re always panicking and thinking, well if I upset them they’re not going to do business with me anymore.”

Worryingly however, around 28 per cent of small businesses believe that the government is already doing all it can to fight late payments.

The learning curve

Lindsey Fish from B2B events company Little Fish Event Management has a couple of clients that often pay their fees about a month or so late. However, she acknowledges that they are good clients that give her lots of work, so there’s a trade-off. “I put up with that because I know it’s coming,” she reasoned.

Where Little Fish’s real problem lies is with clients whose contracts are coming to an end and they neglect their final invoices. Once Fish has delivered the client has no incentive to pay up.

“That job means more to us than it would to a larger firm. It angers me and it causes me a lot of distress.”

One such job remains unpaid from February 2015. The job itself was more of a freelance role, and although Fish positions herself as an agency, the business was only six months old at the time and she was keen to take on work.

“It’s a learning curve regarding the clients that I work with really. At the very beginning you don’t want to turn down work even though you get a gut feeling that it’s not the kind of job that you set out to do.”

Going forward, Fish has instructed someone to chase the claim on her behalf on a no-win no-fee basis – if they win, they will be entitled to 20 per cent of the money. It’s an inherently unfair system, but she needs the money to pay overheads. As Fish said: “It’s literally trying to survive.”

Taking charge

Pearson recommended contacting clients the minute an invoice has gone out – to check it has been received and that all necessary information is present and correct. Small businesses should then make it a priority to keep track of due dates and chase them as soon as a payment is missed.

Pearson offers very tight payment terms, only 14 days, but often isn’t paid until 30 days’ time. “If we had payment terms of 30 days, they’d stretch it out to 60,” she warned.

To keep her relationships with her clients sweet, Pearson aims to establish a system where she makes the deal with one person and chases payment from another. She explained: “[If you] delve down into the bowels of the accounting department, then hopefully you can do sort of good-cop bad-cop to get yourself paid on time.”

Depending on your business model, it might be advisable to hold off on delivery of your service until you have received payment, or to ask for 50 per cent up front.

Maiden Voyage charges up front for a new listing on its website, but at the end of the agreement if the hotel wants to re-list it would be more expensive for Pearson to take its post down and wait for payment than to chase the renewal.

If a business has ongoing contracts with clients, one solution to this problem could be to automate payment collection via direct debit. GoCardless offers such a service for small businesses and startups – clients receive a notification three working days before payment is automatically collected on the due date, cutting out the need for small businesses to chase payments.

A temporary solution for small businesses struggling with cashflow problems as a result of late payments may be to borrow money from elsewhere. Almost half of UK SMEs are “permanent non-borrowers” and have not sought outside funding in the last five years – yet for businesses struggling with cash flow this may seem counter-intuitive. There are plenty of debt solutions available to SMEs and if handled correctly they can be a flexible source of funding when in need.

Overall, there are solutions out there for small businesses if you’re willing to do your research – keep your options open and don’t just wait it out and let your cash flow suffer when you have a late payment due. Keep your relationships with your clients friendly and polite – but don’t be cowed by them. If it’s money you have earned, you have a right to insist on payment.