Late payments force small businesses to the edge

Unpaid invoices in a filing cabinet
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Payment delays continue to cause small and medium-sized businesses stress and anxiety, with new research revealing that 61% of invoices issued by UK SMEs remain unpaid within the debtor day period. But what can be done to stop this?

A new report has found that large companies are continuing to ride roughshod over their small suppliers by not paying them on time or in full.

The report, commissioned by Amicus Commercial Finance, found that 61% of invoices issued by UK small and medium sized enterprises (SMEs) remain unpaid within the debtor day period. Of these, 70% of firms say they rely on getting paid during their debtor day period to avoid facing a shortage of working capital.

The research also showed that that one in six (16%) SME invoices remains unpaid after 90 days and of these, almost half (7%) have yet to be settled after six months.

The study underlines the extent to which SMEs often rely on a small number of customers and delayed payments from these can have serious consequences; according to the findings, SMEs’ top three customers on average account for almost half (49%) of their overall revenue.

‘Devastating’ impact

A recent report from the Federation of Small Businesses (FSB) also highlighted problems around the UK’s poor payment culture. Small businesses report that on average 30% of payments are typically late - compared with 28% in 2011.

The impact this can have on small businesses can be devastating: 37% of small businesses have run into cash flow difficulties, 30% have been forced to use an overdraft and 20% say profits have been hit.

At the extreme end, late payments and resulting cash flow difficulties have caused businesses to fail. In 2014, if payments had been made on time and as promised, 50,000 businesses could have been saved, growing the UK economy by £2.5bn.

With the gig economy – where short-term contracts for self-employed workers is the norm – becoming increasingly common, this situation is likely to force more individuals and small businesses over the edge, particularly around Christmas and new year when funds are generally scarce.

But how can small businesses cope with late payers? What tools, statutory or otherwise, are available to SMEs to help speed up the payments process and ensure cash continues to flow?

What powers are available?

Despite numerous government pledges, a succession of delays has hampered efforts to bring in new legislation to toughen up the UK’s payment code.

A small business commissioner, pledged in the Queen’s Speech 18 months ago, has yet to materialise, although a consultation on what powers such a position would have closed on 7 December – we await the findings of this condoc later this month.

The Late Payment of Commercial Debts Act (1988) was amended in 2002 to include fixed penalties, and businesses or freelancers can charge £40, £70 or £100 depending on the size of the invoice (less than £1,000, less than £10,000 and above £10,000, respectively). This can be charged in addition to the interest payable at 8% over Bank of England base rate.

However, many freelancers or small business owners, particularly those looking to stay onside with large companies responsible for a large proportion of their income or new customers, are often reluctant to get on bad terms with later payers.

The FSB has also called for the Chartered Institute of Credit Management and the Department for Business, Energy and Industrial Strategy (BEIS) to give real substance to the Prompt Payment Code (PPC) through a ‘three strikes and you’re out’ penalty system that tackles repeat offenders, and by making the PPC mandatory for the largest firms.

Best practices to avoid late payments

Speaking to AccountingWEB at the Accountex Conference last year, business consultant Peter Dilger urged company owners or finance departments to be more proactive in their credit control dealings.

“When do you start sending invoices?” he asked. “When do you start chasing? If you’re waiting until the customer is 30, 40 or 50 days overdue before you start to chase them, that’s too late.

“Ultimately you’re in control of this. You might not want to lose business, but a customer who doesn’t pay is not a customer.”

Another best practice to adopt when you’ve agreed to work with a company is to send over terms and conditions for their written approval, setting the tone for what to expect from the business relationship. Whether the company agree to this or stick to the terms is often, unfortunately, another matter.

Early payment discounts can also incentivise prompt payment. Some businesses offer a small percentage discount, which they will get discounted from future invoices as a credit or simply taken off their bill. While this method may help with the business relationship and maintain cash flow, it does further reduce margins at a time when they may already be squeezed.

Name and shame

A more direct approach is to ‘name and shame’ late paying companies. While some opt to use social media sites such as Twitter, there are also websites such as the Forum of Private Business’s ‘Hall of Shame’, where firms using bad payment practices are singled out.

However, unless done anonymously, which lessens the impact of the complaint, this can become a potentially tricky avenue in terms of continuing the business relationship. Also, unless the invoice terms are completely watertight (and in some cases even if they are) the complainant may hear from the large company’s in-house legal team.

 

What steps does your company take to deal with late payers? Are there any powers you’d like to see enacted when the small business commissioner legislation appears later this month?

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

Replies

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05th Jan 2017 11:19

"In 2014, if payments had been made on time and as promised, 50,000 businesses could have been saved, growing the UK economy by £2.5bn."

A nice round number, presumably plucked out of the air.
As with every aspect of running a business, it's how these things are managed that makes the difference - in this case effective credit control.

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By svend
05th Jan 2017 11:51

Legislate late payers need to provide explanation of late payment to the creditor. This additional admin burden on business should reduce late payers.

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05th Jan 2017 12:23

The time and place to do something about late payment is in the sales conversation!

This is the time to state that your standard terms are payment before work starts, or whatever else you want to say, plus the sanctions you never fail to impose for late payment.

In fact, you should cover all the salient points of your terms and conditions in the sales conversation - between discovering the prospect's problem and the circumstances in which it sits, and making your proposal.

Don't be scared of taking this step. You have as much freedom to choose your customers as they have to choose their supplier. Choose to only work with 'clients from heaven', and find out whether they are from heaven or hell before you get as far as proposing anything!

As the article says, "a customer who doesn't pay isn't a customer", but by the time you find this out in the 'normal' way, you'll have incurred a lot of costs, a proportion of which will not be recoverable.

David Winch
Sales & Marketing Consultant
Cambridge

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By ashbury
05th Jan 2017 13:06

As an ex-small business owner (now retired) I had no hesitation in reminding recalcitrant customers of whatever size that my terms of business included penalties as recommended by the Federation for late-payers. The only ones I lost were those who wanted to habitually abuse my financial largesse who weren't that much good to me anyway. The larger ones that I wanted to keep realised that they had to treat me with more respect and continued doing business more on my terms. But this situation can't go on. Small businesses cannot act as a free source of funds for larger ones. The economy needs them as in time many will grow into larger businesses and make valuable contributions to the nation's wealth. In the meantime they must be protected from bullying predators by effective legislation.

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By ShayaG
05th Jan 2017 14:52

Customers pay late, in the majority of instances, because they can. It's a matter of relative bargaining power. Say you are a handyman / electrician who does 25% of your work for one managing agent - who never pay on time. If you charge them interest, they may - or may not - pay it - but they will certainly find a competitor and never give you any further work. If you have to pay the mortgage your only option is to swallow your pride and keep on nagging every month.

It's a rather typical accountant response (and symptomatic of the shortcomings of the profession) that we (a) think that we know the client's business better than the client (b) that there is a quick fix. Often we don't and there isn't.

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12th Jan 2017 17:12

Spend control is all important to a company’s bottom line and can be the difference between a profit and a loss, but all SME’s know you cannot pay your wages bill with profit. Cash is king.

If your own processes in billing are flawed, and you bill your customers late, all that work in delivering an excellent product or service will be eroded as you will have to wait for the cash. Even if you bill on a timely basis you may still have to wait for the cash if you do not comply with your suppliers ordering, receiving and invoice processing process. So know your customer.

The other side of the coin is your own management of supplier invoice processing. Are you able to process supplier invoices on a timely basis and choose when you pay them (in control), or are you struggling to process invoices before their due date (out of control). The consequences of being out of control are far greater than just the barrage of calls from suppliers asking for a payment date.

SME’s themselves also need to consider the impact of their own actions on both themselves and other SME’s. A good starting point is an efficient invoice processing system that enables management of working capital creditors. This in turn should give your own customer’s confidence to do business with you due to its impact on your credit rating and control of your business.

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