Ninety-seven per cent of businesses that responded to a government consultation said they had experienced late payments.
The consequences of late payments can be serious with businesses unable to grow, employ new staff, purchase equipment and pay suppliers.
In the most severe cases insolvency and redundancy have been the reported outcomes.
The fact is late payments are not acceptable. No customer or client should be able to put the future of your business at risk. Late payment is breach of contract. Robust personal guarantees and payment plans need to be put in place.
How to reduce late payments
- Reduce your terms to 30 days or less
Most businesses offer typical payment terms of 60 days, but this means you are already waiting two months to be paid.
If payment isn’t forthcoming and your accounts department needs to chase, that could be another 30 days.
If payment still isn’t made and you pass the debt to your solicitor for recovery a pre-action protocol letter will demand payment within 14 days for a limited company and 30 days for an individual.
When you add all of that together you will have been waiting four months from the date of your invoice, which is clearly unacceptable.
- Make sure your terms and conditions of business are fully updated
Your terms and conditions should be communicated to your customer at the outset of the relationship.
They should make it clear that if payment is not made, you can claim interest on all amounts overdue together with compensation.
If recovery is necessary, you should have a clause seeking full payment of your legal costs for recovery under the contract.
In your terms you can reference The Late Payment of Commercial Debts (Interest) Act 1998, The Late Payment of Commercial Debts Regulations 2002 and The Late Payment of Commercial Debts Regulations 2013.
- Check out your customers
Before you agree to work for a business, undertake a full credit check against the company or individual to see whether they will be in a position to pay your invoices. You need to obtain a personal guarantee from a director or directors. Nearly 60% of businesses who responded to the government consultation said they did not do this.
- Consider Direct Debit
This is the most effective way for businesses to collect payments from their customers on time. You know immediately if there is any default and can stop all works or production if necessary.
- Do not delay
An early debt is a recoverable debt. You have a far better chance of receiving payment if you act quickly.
If that wasn’t incentive enough, it has been found that companies that manage their outstanding debts outperform their competitors.
- Check your invoices
Make sure all the information on your invoices is correct: the value of the invoice, the purchase order number and the debtor’s address. This will stop delays and errors.
- Agree all prices upfront
Having a written agreement for the contract price and extras or variation under the contract will avoid any delays or arguments taking place.
- Easy payment terms You could offer your customers a discount to pay early, for example 5%.
Legislation on the maximum number of days in which an invoice must be paid has been suggested as a resolution to the issue of late payments, along with simplification of the interest that can be charged.
From April 2017 companies with an annual turnover of £36 million or more, £18 million balance sheet and 250 employees have had to report on their payment policies, practices and performance.
This is a start but must be rolled out for all companies. Businesses need to lobby harder when negotiating payment terms and seek the help of the Small Business Commissioner.
Late payments are a distraction and an inconvenience that choke the cashflow of businesses and impact productivity.
If your customer has failed to pay within the agreed timeframe, they are in default and you must take control of your cashflow and debtors by taking swift action.