Running a small company – dealing with late payment problems

overdue invoice limited company

Late payments can cause small businesses a serious cash flow headache and in some cases, lead to the company going out of business altogether.

Recent research showed that by the end of 2014, SMEs in the UK were owed some £39bn collectively and in a recent poll of 1,100 businesses carried out by YouGov, 85% of owners said they’d had problems with late payments. Sound familiar? If so, what can you do to tackle late payments before the problem gets out of hand?

Here we look at a few solutions, including some pre-emptive steps to take.

Spell out your payment terms

Be explicit about your payment terms and conditions on all invoices or contracts you issue to clients. You should also display these in the relevant section of your company website if you have one. That way, you have a clear procedure to follow if payment is late. ‘Late’, according to current legislation is over 30 days, unless you state otherwise.

Consider a credit check

You could ask a credit reporting agency to run a check on a potential new client. This will cost but depending on the potential new client – and the sums involved – may be a step worth considering.

Get a name

Always get a contact name and direct number if possible for the person who deals with invoices and sends out payment. This can help if you have to chase up an overdue payment and can go straight to the source.

Keep on top of invoices – and act!

Make sure you have a system in place for monitoring the status of invoices at any one time, including those about to be due and any ones already overdue. Don’t let days or weeks pass simply hoping payment will come, even if it’s from an important customer. As soon as an invoice is late, put in a reminder call – be polite but firm.

Refuse to be fobbed off

If you do agree to a client’s request for more time to pay, set a strict – and final – deadline, explaining that you won’t be able to continue providing your products or services beyond that point until you are paid. You can also mention charging interest for late payments at this point (see below).

Interest on late payments

You have a legal right to charge interest on late payments and to reclaim reasonable costs for debt recovery, through an agency, for instance. According to current legislation, you can charge Bank of England base rate, plus 8%. To work out a daily rate, multiply the sum owed by the base rate + 8% and divide by 365, for the days of the year. This is what to charge until you are paid. For more information, see https://www.legislation.gov.uk/ukpga/1998/20/contents.

Incentivise early payment

Giving customers a discount for paying their invoice is definitely worth considering. Again, make sure customers know about this by putting it on their invoice or if it’s a new policy, contact your clients to let them know they can save by paying promptly. How much you give off for early payment is up to you, but a 5% discount is a good yardstick.

Make it easy for clients to pay

Make it simple for clients to pay – and to invoice them – by doing everything electronically. Use a recognised payment service such as BACS or Faster Payment Service (FPS) to facilitate payments as this will speed everything up. It also means you can’t be fobbed off by ‘the cheque’s in the post’ or ‘it must have got lost in the post’ routine.

Pay your own bills on time

Paying your own bills on time is good business practice, especially if the invoice is from a client you are doing business with, or hope to work for in the near future. Lead by example by always paying promptly.

Debt collecting

For many small businesses, using a debt recovery company will be the last resort. By all means, advise your client that if he or she doesn’t pay up you may be left with no other option. This alone may be enough to get them to respond. Alternatively, a call from a debt recovery agency could do the trick if further steps, including legal action and the possibility of a County Court Judgement being issued, is to be avoided.

For more information and advice on the late payment of commercial debts, try http://payontime.co.uk.