Late payments are having a devastating effect on small businesses, with 50,000 going bust each year because bills are not settled on.
A recent survey found that a third of payments to small businesses are late, leading to 37 per cent of those companies running into cash flow difficulties and one in five experiencing a slowdown in growth. The report, conducted by the Federation of Small Businesses (FSB), which provides advice and help to hundreds of thousands of firms, found that each late payment is worth an average of £6,100, and almost a third of firms are forced to dip into overdrafts to cover the missing cash.
Poor payment practice is having a toxic effect across the economy, and its effect is wide-ranging. A business that has not been paid does not have access to funds to pay its own suppliers and staff, who in turn then experience struggles of their own. A third of businesses are wasting valuable by spending more than a day each month in chasing late payments. While time tracking software, such as that offered by TallyPro, can record time spent on administration, these are effectively wasted hours.
Bullying is ‘rife’
Legislation in the UK states the period for payment in a business-to-business (B2B) contract should never exceed 60 calendar days, unless expressly agreed by both parties. However, the payment terms of some large businesses have grown from 30 days to well over 100 days in some cases, with instances of supply chain bullying said to be “rife”, according to the FSB.
Companies should not blame themselves for another firm’s inability to pay on time. However, many late payment issues can be checked by a pre-emptive approach that includes gathering data on the supplier or customer to issuing contracts that make sure your business doesn’t pay the price of another’s poor approach. Business tools, such as TallyPro’s KashFlow Payments, can also play a part in simplifying payments and employee time tracking.
Time to deal with late payments
Speaking to TallyPro, the FSB’s Ben Baruch gave 10 tips for avoiding and resolving late payment problems.
1 Know your customer
Stay close to your customers and talk to them so you know what their plans are and if they might affect your trading relationship with them. Make sure that no change to the company you trade with slips through unnoticed.
2 Be up front
Make sure the agreed payment terms are documented and agreed into the future so you are protected against terms that might subsequently be imposed. If your customer tries to impose worse terms retrospectively, and they are a signatory to the Prompt Payment Code, raise a challenge at promptpaymentcode.org.uk.
3 Do your due diligence
If you’re selling to a ‘large company’ (Turnover >£5.75m or >250 staff), check the Duty to Report portal to see their reported payment behaviour and standard payment terms. If they’re asking you for terms longer than their standard, you need to understand why and negotiate them down, or ask for something in return.
4 Be prepared
If you grant longer payment terms than your suppliers grant you, there will be a gap in your cashflow that you will have to fill. Consider talking to your bank or finance company now to make sure that access to finance when you most need it won’t be a problem.
5 Consider exchange rates
Review your budgets and cashflow forecasts to ensure you can cope with the adverse impacts of any exchange rates movement.
6 Make it official
Include the words: “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” on every invoice, and print your terms and conditions on the back. You can charge interest and compensation without mentioning it on the invoice but it helps to let your customer know you are serious about expecting payment.
7 Remember the money is rightfully yours
Implement a basic process for following up invoices and avoid late payments. Never be embarrassed or afraid to ask for money that should rightfully be in your bank account. If your invoice is disputed for any reason, fix the problem as quickly as possible so the excuse not to pay is removed. If payment becomes overdue, raise an invoice for compensation and interest.
8 Use the experts
If the invoice remains unpaid, be prepared to use an expert third party to assist you in collecting payment. The sooner you do so, the greater the likelihood of success and never just hope payment will arrive soon.
9 New markets
Keep an eye on your competitors to see if they’re trading in new markets or have changed their focus.
10 Seek professional help
Use the information, advice, and guidance provided by business organisations and professional bodies like FSB.
So businesses should protect themselves from the outset, but can be assured that there is plenty of help out there should they experience problems.
Baruch adds: “The Government’s new Small Business Commissioner is set to launch later this year and will contain an online resource including all the latest information for small businesses who may be experiencing a dispute over late payment.”