Business Knowledge Hub

How to fight back against late payments

Late payments are a national phenomenon that affect small and medium sized businesses in particular. Here’s everything you need to know about the troubling trend including how you can protect your business from late payment problems.

Late payments present a major challenge to many small businesses. According to the Federation of Small Businesses (FSB), one payment in every three made to small businesses is late. The problem is exacerbated by the time it takes to chase these payments up – an average of 1.2 working days a month.

It can be extremely difficult to maintain financial balance when payments don’t come in on time. Indeed, the FSB figures confirm that some 37 per cent of small businesses have reported running into financial difficulties as a result of late payments.

So how can you minimise the impact of late payments on your business? And what is the best way to eliminate the problem? Here’s how to make the best of a bad situation.

The late payment phenomenon

The FSB revealed that late payments are most likely to be made by large private businesses. In fact, 61 per cent of late payments to small businesses come from companies with 50 or more employees. Supply contracts are often part of the problem, and many small business owners find that delays become the norm when supplying larger clients.

It is worth remembering, however, that larger businesses deal with a larger volume of transactions and payments, which can make it more challenging to fulfil finance obligations. The harsh reality is that some bigger businesses will simply move smaller businesses to the bottom of the list.

Who pays late?

  • The majority of late payments are made by large private businesses.
  • The average length of a late payment delay is six weeks.
  • The average value of a late payment due to a small business is £6,142.
  • Ten per cent of small businesses report 80 per cent of payments being late.
  • Retailers see the longest average payment delays.
  • Banks see the shortest average payment delays.

How to protect your company against late payment

So it’s not a great situation, but there are steps you can take as a small business that will help reduce the chances of your payments being received late.

WARNING: some of the advice that follows is blindingly obvious. But before you discount it entirely check in with whoever does your business accounts – are they actually doing all the little things you think they’re doing? Even with the best intentions, busy periods can lead to corners being cut so rewind and check things through from the ground up.

How to avoid late payments: in summary
  • Know your clients.
  • Get clients to sign a contract including payment terms.
  • Include a payment schedule on invoices.
  • Immediately pursue clients if they start to pay late.
  • Consider implementing late payment fees.

Stating clear payment schedules in your invoices is an obvious first port-of-call to try to reduce late payments. Every invoice should include a payment deadline to help your clients understand that payments are expected on time.

Make sure you know who you are dealing with when you supply a product or service to a new customer, and ensure they are genuine. Putting together a contract that details payment expectations and requesting that clients sign it is another way to protect yourself. Introducing a late payment fee works well in some cases, but this needs to be detailed in a mutually-agreed contract beforehand if you’re likely to stand a chance of implementing it.

Finally, if one of your established clients starts to pay late, don’t brush it under the carpet and hope the problem sorts itself out. Acknowledge the late payment as soon as possible and try to agree a solution before it becomes a regular pattern.

How to avoid cash flow problems

The big problem with late payments, of course, is the knock-on effect they have on your company’s cash flow – especially if you’re waiting for payment on a big contract.

So in addition to improving how you process finance communications with clients, turn your eyes inwards and make sure you’re taking steps to keep your cash flow healthy:

  • Establishing clear payment terms is an essential part of managing your small business cash flow.
  • Invoice promptly after you’ve delivered on the agreed work.
  • Make it easy for clients to pay you. Provide your business account details on invoices so that payments can be made online. Cheques cause obvious delays, and thus aren’t ideal.
  • Consider asking clients to set up direct debit payments if you provide regular services.
  • Consider subscribing to a cloud-based accounting software service, to help you keep good financial records for your business.
  • If you find yourself unable to make payments due to late receipts, contact debtors and negotiate new terms sooner rather than later to keep goodwill in tact and keep your options open.
  • Establish a clear line of credit with an overdraft on your business bank account or a business loan while your finances are good, so you’re well prepared if you hit a cash flow crisis.
  • Keep your bank informed if you are experiencing cash flow problems.

How to avoid paying late

Sometimes, even with the best of intentions, you might find yourself on the other side of the fence, unable to pay an invoice on time due to problems of your own. There are a number of possible reasons for this, such as:

  • Poor time management
  • Poor financial planning
  • Poor organisation
  • Cash flow problems

The issue may even be a knock-on effect of experiencing late payments yourself! Whatever the cause, don’t let it become a habit.

If you find yourself on the receiving end of a late payment fee, don’t despair - take it as a signal that it’s time to get your house in order.

The first step has to be to check you and / or your team are doing a good job of managing your small business accounts. Make sure your finances are held somewhere accessible so you’re aware what’s owed when. If it’s a purely organisational issue that means you’re paying late, then set up payment reminders on your calendar as well.

Equally, if time is the problem, consider asking suppliers to work to your regular billing cycle if they aren’t already so you can balance your income and expenses. Remember unless you agree another payment date, your customers must pay you within 30 days of receiving your invoice, goods or service so you’re well within your rights to suggest such terms to your own suppliers.

Finally, if you do find yourself on the receiving end of a late payment fee, don’t despair. Take it as a signal that it’s time to get your house in order.

Perhaps the most valuable advice for small business owners is to remember just how much of a dire impact late payments can have on your business. If this means you have to plan for the worst, then so be it.

You can still hope for the best, but taking concrete measures to protect yourself and your business is vital.

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