It’s no secret that late payments can be a massive headache for small businesses. Often considered ‘necessary breathing space’ by companies who cough up late, the financial repercussions for the smaller businesses left waiting are anything but necessary, with only a couple of late payments having the potential to push SMEs (small-medium sized enterprises) into insolvency.
To illustrate the extent of the problem: one survey by the digital banking platform, Tide, shows that the average SME in the UK is chasing up to £8,500 in late payments each year. That’s around £50bn for the whole country. Aside from the obvious damage they can cause to a company's cash flow, they can also be a substantial drain on time, with the average UK business spending one and a half hours following up on late invoices each day.
As the UK is still reeling from the economic consequences of Brexit, while being faced with the pressing impact of the coronavirus. Finding solutions to these late payments can often make the difference between a business thriving or going under. The extent of this problem is so large it’s starting to be recognised by the government. Luckily, plans to tackle these late payments have been announced. However, until this promised ‘brighter future’ comes to fruition, it’s essential that small businesses do whatever they can to improve their own situation before it’s too late.
We’re here to help you navigate this reality. In this article, we’re going to run you through the ins-and-outs of late payments, before outlining what you can do to prevent them, as well as what help is out there if your business happens to find themselves subject to a late payment.
Simply put, a late payment is an amount of money that has been sent after the end of an agreed date or grace period. Late payments can be made from customers or businesses. Aside from affecting other businesses, they can also affect entrepreneurs who are just starting out, as well as self-employed freelancers.
Smaller businesses are disproportionately affected by late payments, because larger companies are able to have greater control over payment terms. According to a report by the Federation of Small Businesses, around four out of five small-businesses have been paid late, which shows how significantly impacted smaller-sized enterprises are by this problem.
These small businesses are essentially at the whim of larger companies, because they have fewer powerful administrative and legal resources behind them. There is also more pressure on small businesses to maintain positive corporate relationships with bigger businesses. This often leaves them with the lower hand.
To be more specific, microbusinesses in particular are even more likely to fall victim to late payments. Defined simply as a business that employs fewer than 10 people, microbusinesses make up a whopping 96% of all businesses in the UK. The reason that they suffer more from late payments is predominantly that it's harder for them to assert their rights, especially when they’re up against renowned retail giants. The smaller the business, the fewer resources and less industry standing they have. So, unfortunately, the higher risk they face of being taken advantage of.
Late payments can have far-reaching implications across many areas of a small business. From practical inconveniences to financial difficulties, and the subsequent problems arising from this, here are some ways that late payments can be damaging to businesses:
One significant way late payments can inconvenience a business is because of the knock-on effects they can have on a company's supply chain. When payments are made past the agreed grace period, it’s much harder to pay suppliers on time, and this can contribute to a series of late payments being made to a series of businesses. Damages to supply chains can result in shortages of inventory, which can obviously cost the business money, but more importantly, it can harm the reputation of the company and make them seem unreliable.
If late payments are consistent, they can have a substantial impact on the cash flow of your business. In order for a company to recover from this, it’s not uncommon for business owners to cut salaries to help keep their heads above water. As a survey by BAC has shown, 28% of businesses that were suffering late payments responded by cutting the salaries of their staff to balance out the loss of income. Not only can this have damaging repercussions on the personal life of employees, but it can also significantly impact company morale.
After small businesses have been subjected to late payments for an extended period of time, it can even result in businesses being forced to shut up shop. As Rachel Reeves, chairman of the Business, Energy and Industrial Strategy (BEIS) Committee explains, many SMEs across the UK are being purposefully placed in a ‘stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their supplies, causing these firms financial instability’.
This financial insecurity can ultimately force businesses to go out of business. The impact of this is also extended to the wider economy, with the closure of small businesses costing the UK around £2.5 billion each year. Furthermore, with the scale of this phenomenon only growing year-on-year, there’s even been suspicions that it could push the country into an impossibly deeper recession.
Dealing with late payments can be incredibly time-consuming. With the average business chasing around five late invoices at once, this is simply a task that most business owners don’t have the time or resources to deal with. In addition to being a source of irritation, it also can waste a significant amount of time, and distracts workers from getting on with more important tasks.
While we wish it could be as simple as waving a magic wand to get companies and customers to pay on time, it’s not quite that simple. However, there are lots of strategies you can keep under your belt to increase the likelihood of being paid on time. So, here are some of our favourites:
If the payment invoices you send out are cluttered, complicated, or laid out in an unclear format, there is a higher chance that companies or individuals will take a longer time in getting back to you. This is largely because they can create unnecessary misunderstandings and raise the likelihood of queries being raised, which can run the risk of elongating the process - or prevent them from getting back to you at all.
For this reason, if you want to get paid on time, it is important to keep documents clear, simple, and easy to digest. Also, even though this may sound obvious, It’s also vital to ensure all the necessary information is contained on the relevant documents - such as payment details, the due date, company information, and (if needed) delivery notes. This prevents your business from being held accountable for not providing enough relevant information, and it also helps to streamline the process as much as possible.
Following on from the previous point, adapting to the changing pace of the business world and keeping your company up-to-date with the latest software may also prove to be beneficial when dealing with your finances. If you’re still communicating with companies and chasing payments through the post instead of email or other digital methods, you’ll be left at the whim of longer processing times, and it’ll take longer to follow up on late payments.
In addition to this, downloading comprehensive invoicing software may be a necessary move for businesses who are experiencing growth. While Microsoft Excel provides a sufficient way to track and manage invoicing, experimenting with new platforms may give your business the tools it needs to modernise its practices, while helping you to more efficiently carry out tasks like calculating taxes and VAT.
Understanding and recording information on the business you’re dealing with gives you something to fall back on if things don’t go according to plan along the line. Noting things down like their legal status, as well as their full company name, and trading style, helps you to be sure whether credit should be offered - as well as preparing you for the future, in case you happen to encounter any legal proceedings. Also, by keeping tabs on the companies that you come into contact with, it’s easier to take action if they ever challenge you with late payments.
It’s simple enough to gather these details, and you’ll be able to verify this information with any other company documentation you have obtained from there. However, if the company is trading under a different name, you can check the YouGov website to access further information on how limited companies operate.
Once you’ve decided on appropriate payment terms, it is important to let the business know about the nature of the conditions before they decide to borrow from you. If these terms aren’t agreed on initially, it can make it harder to hold the business to account if they fail to pay you back on time.
When writing up your payment terms and invoices, we recommend that you state this somewhere on the documentation:
“We will exercise our statutory right to claim interest (at 8% over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.’’
This will help your business to assert itself from the get-go, and even if you decide not to act on it, it will likely serve as a useful deterrent against late payments. In addition to stating this right, it’s also important to mention that interest charges may occur on late payments, to further encourage them to pay on time.
It’s also very common for businesses to request for extensions to be made on payments, so to reduce as much late-payment risk as possible, it’s useful to have clear processes in place for dealing with businesses who ask for payment extensions.
While this may seem obvious, invoicing errors are a common contributor to long payment cycles. It's common sense that staying organised and putting the correct payment terms on invoices helps speed up the process.
Simply put, the faster invoices are generated and sent to the customer or company, the sooner the payment is likely to be received. So, this is why dealing with the invoices and sending them off individually, rather in weekly batches, may make more economic sense.
As businesses around the country are quickly modernising, as is the way they are sending and receiving payments. If your business is only offering up one fixed way to send payments, it may significantly slow down the process because it may not be compatible with other companies and their ways of operating. While many companies may still collect invoice payments by bank transfer or cheque, opening up alternative payment methods increases your chances of getting paid quickly.
With one click ‘e-invoice’ options now widely available, being open to more digitally advanced forms of payment may be able to make the difference between waiting weeks for the cheque to arrive in the post and getting paid on time.
Sometimes, taking all the preventative measures in the world isn’t enough to prevent late payments from occurring. Rest assured though, as there are processes out there to help you address and potentially speed up these payments. Here are just a few of the options that are currently out there. Contact the company or individual
Before you make any hasty decisions, it’s best to directly contact the company or individual when your debt first becomes overdue. More often than not, the overdue payers may just need a simple prompt to remind them, and redeeming the situation could be as easy as writing a simple email or making a phone call.
If this initial form of contact doesn’t prove successful, sending out a formal letter requesting payment within a set time period is a tried and tested way of getting the debtors attention. It’s also useful to include a warning of a court claim if the money isn’t sent over within the specific time frame, to indicate the severity of the situation. Typically speaking, reaching out in these two ways is enough to prevent the need for more serious legislative action.
If your advances have been ignored by your client, and the money that they owe you still remains unpaid, it may be worth contacting a mediation service. If you’re unaware of this service, it’s effectively a way to get a third party to facilitate a dialogue between you and your debtor.
Despite having high success rates, these services tend to cost around £50 to £100 an hour. Also, to check that the mediation service is reputable, it’s important to contact one that has been registered with the Civil Mediation Council. For more information on this service and details on how to find one in your area, visit the Civil Mediation website here.
If both of the above methods fail, it may be time to take things slightly further, by making a complaint with the Small Business Commissioner (SBC). The Small Business Commissioner has been appointed by the Government to address late payment practices in the private sector, so they’re perfectly equipped to help smaller businesses issue complaints to larger business customers. In addition to this, they also offer up general advice on the subject to small businesses; so, they’re definitely worth contacting before you resort to other, more drastic options.
If the debtor is a public sector organisation or another business, you're well within your right to charge them additional interest. Also, if you want to add additional pressure, you can leverage a fine or condensation, depending on how much they owe you. When it comes to interest, the standard statutory rate is 8% above the base rate each day. For help with calculating how much debt is owed to you, the Pay on Time website provides you with a handy payment interest calculator, as well as more information on how to navigate the world of late payments.
If your efforts still remain fruitless, small businesses and self-employed individuals do have the right to take debtors to the small-claims court. This may be the push that your client needs to understand the severity of the situations, and normally this step is enough to prompt the business to pay their overdue payments.
Unfortunately, if you use this action, you will probably have to pay a court fee, and due to the nature of the process, you may not end up getting your money back at the end. For more information on what steps you can take to claim your money back, take a look at the gov.uk page here.
Sometimes, despite exhausting all possible options available, claiming late payments from your clients does not always turn out to be a success. Due to the monopoly of power that most large businesses have over smaller ones, the amount of leverage that SMEs can have over their clients often remains limited. However, if these late payments have caused a dent to your businesses cash flow, and you’re in need of alternative financing options, we might be able to help.
Here at MarketFinance, we offer a range of funding solutions that are designed to help out SMEs in a variety of different ways. So, for businesses that have been bearing the brunt of late payments, our contract finance, selective invoice discounting, confidential invoice discounting, and loan services all provide simple and accessible ways to help tide your business through any difficult financial times.
All of our funds are quick and easy to access, they don’t include any hidden fees, and our helpful customer service team is here to guide you through every stage of the process. For more information on the resources we offer, as well as details on how to apply to these services, just take a look at our website here.