September 23, 2014
Of all the challenges faced by small business owners, the one that probably causes them the most sleepless nights is late payment from their customers.
It’s also one of the most common problems encountered by small and medium enterprises (SMEs); a recent Yougov poll suggested that about 85% are affected, while the sums they are owed have reached £39.4 billion, according to data published by direct debit company Bacs Payment Schemes.
The government recently created a Prompt Payment Code, designed to encourage larger businesses to speed up payment times. However, it is entirely voluntary, and its impact on the problem is questionable. But there are some practical steps that small business owners can take to minimise the impact of late payment.
In the first instance, SMEs should check whether customers operate a purchase order system and, if they do, obtain the necessary purchase orders, says Robert Holland, a partner at law firm James Cowper. “Without them, payment is going to be difficult and almost invariably delayed. It may sound obvious, but it still trips businesses up,” he says.
There is also statutory a right to claim interest on late payments, with rates set at 8% above the Bank of England base rate, but it is rarely used. “We would urge SMEs to use this right, particularly if the relationship is a one-off or infrequent,” says Holland. “If a customer is particularly bad at paying, consider whether they are really worth the trouble.”
However, many finance experts believe that good business practice can often achieve the desired outcome more efficiently and effectively than legislation.
Mark Edwards, general manager at online legal service provider Rocket Lawyer, says: “A professionally worded late payment reminder letter can prompt a customer or business to take swift action to pay your invoice. If a first payment reminder letter and a follow-up second payment reminder letter fails to have any effect, use a letter before action, before commencing legal proceedings for collection and enforcement of the debt.”
Having a robust accounting system can also help in the battle against late payment. Digital marketing agency Koozai recently moved to a cloud-based accounting system that incorporates a number of useful features.
Finance and HR manager Hannah Norman says: “One of the best features is being able to download your bank feed straight into the accounting system, which will automatically match a payment to an invoice, based on the amount and any other details that match, such as invoice number or name. This plays a very big part in keeping on top of unpaid invoices.”
Other useful services used by Koozai include Experian, which provides access to the payers’ company details for a small fee. “By setting them up as a customer you receive an email if their credit has recently changed, which flags up possible payment issues before you experience them,” says Norman.
Other tips include sending out courteous reminder emails three or four days before the invoice is due to clients who have payment terms. “A little reminder stating the invoice is coming up for payment is sometimes all that is needed, especially if it was sent nearly 30 days ago,” says Norman. “As a last measure, depending on your contract, you may have a late payment charge clause, which can be used as a reminder to the payer that you are keen to avoid going down this route. My philosophy is to be persistent, but courteous with it. Being polite goes a long way.”
For firms whose cashflow is being impacted by customers who simply don’t pay up on time, there are financial solutions available that can tide them over. James Cowper’s Holland says: “If customers are habitually late payers it might be worth considering invoice discounting, where a third party advances a percentage of funds against unpaid invoices. This is a great way of helping cash flow.”
There are also services such as Borro, an online personal asset lender, which has loaned £20m to business owners, many of whom use the service as a way of bridging the gap left by late payments from their customers. Typical lending is for around four months and the interest rate varies, but starts from 2.49% per month upwards and is dependent on the asset and the value of the loan. The bigger the loan, typically, the lower the rate.
Many small business owners have recognised that due diligence on their part can go a long way to avoiding late payment headaches.
Andy Turner, founder of PR consultancy Six Sigma PR, says: “Credit control in small firms varies massively in my experience; before you can even begin to get paid you have to set out and agree in writing what the payment terms are going to be, and what happens if they are ignored.
“If your customer is another business, you also need to check the creditworthiness of the company and its directors. A great, low-cost way to do this is through business information service DueDil, which I have used occasionally.”
But even when all this is done correctly, once business owners become caught up in their day-to-day operations, it is easy to forget to send out bills on time, or to chase promptly.
“I know of some firms that have allowed unpaid bills to mount up for fear of upsetting a key client, or have failed to respond effectively when an unpaid bill is challenged by the customer. This is a sure fire way to end up in debt or worse,” says Turner.
The involvement of a debt collection agency or a firm of lawyers may become necessary to secure payment. If a customer does get into difficulty, the advice from Wellers Accountants is to tread carefully.
Partner Stuart Crook says: “If you rush in, you may precipitate action by larger creditors who have a prior claim. In general, you have much more chance of recovering debts if a rescue plan is put into place rather than the company going into liquidation.”
Other measures he suggests for minimising the risk of delayed payments involve flexibility around credit terms. “Set up a facility for payment by credit card – credit card payments offer greater security – and think about offering discounts, for example, 1% for early payments, while always balancing the extent of the price cut with the benefits of an improved cash flow.”
Where substantial sums are involved, SMEs can also consider taking out insurance against a customer’s failure to pay.