The government says that every large company must make a board member responsible for late payments to small business, and they need to report on progress in annual reports.
Giving his Spring Statement in the House of Commons this afternoon, Chancellor Philip Hammond announced that the business secretary has been tasked to see the move through. The Chancellor said that a non-executive director should be responsible for the supply chain through the audit committee of every large business, and report back through the annual report on progress.
Nearly half of Britain’s micro businesses suffer from chronic late payments from clients. Just 52 per cent of invoices sent during 2017 were paid on time or within three days of payment deadlines, according to research by accountancy software firm FreeAgent.
Over 50,000 businesses go bust each year because of late payment, which depresses the economy by about £2.5 billion. And there are around £500 billion worth of unpaid invoices currently in the UK.
Federation of Small Businesses (FSB) chairman Mike Cherry hailed the Chancellor’s announcement, saying “the end of late payments could finally be in sight”.
“At a time of great uncertainty, the Chancellor has shown today that there is still plenty of scope to support the UK’s small businesses. Poor payment practices by big businesses towards their smaller suppliers are rife and pernicious, leading to the closure of 50,000 small firms a year.
“Four out of five small businesses have been paid late, and we told the Chancellor that today was the moment to act, to tackle this scourge once and for all … It can’t come soon enough, to bolster small businesses at a time when they are in great need of support and a lift in confidence.”
How to stop late payment
If you’re still struggling, here are five top tips to avoid late payment and control cash flow.
1. Get your terms and conditions right – Creating a standard set of terms and conditions can protect you from late- or non-payment, limiting your liabilities and providing you with some security. Make your customer aware of the terms before doing business with them and, if possible, ask them to accept them in writing. Your terms and conditions should cover:
- the price
- your arrangements for delivery
- the payment terms – if you don’t agree a credit period with your customers the law sets a default of 30 days
- your right to charge interest on late payments and claim compensation for debt-recovery costs
2. Credit check your customers – You can check your customers credit in the following ways:
- check that bank references are genuine
- if possible, check your customer’s payment record with some of their other suppliers. Click here for a guide on credit checking from The Better Payment Practice Commission.
- pay for an online credit rating from a credit reference agency
- check a limited company’s accounts at Companies House
- search the Register of Judgments Orders and Fines – held at Registry Trust Ltd
- check with the Insolvency Service. Click here to visit the site
3. Reduce payment risks – Asking for a deposit or advance before supplying goods or services will reduce the risk of not receiving payment.
Alternatively, the funds could be held by an independent party until the work has been carried out or the products supplied. Banks may be willing to offer this service or you could use a stakeholder fund, which gives the contractor access to working funds while providing the client with some security.
Other ways of reducing late payment risk include:
- Third-party guarantees – legally binding agreements for a third party to pay if your customer does not
- Credit insurance. This will cover you if your customer becomes insolvent
- Automated payment systems, such as BACS or CHAPS – these will provide payment certainty and prevent the risks associated with bounced, missing or lost cheques
- Legal expenses insurance – this covers the costs of recovering debts though the courts
4. Chase up late payment quickly – If your customers know you are quick to deal with late payment, they will be less likely to delay or ‘forget’ to pay. You could also offer a small discount for reliable customers who pay within the credit period regularly, although this would need to be managed closely to ensure your business was not losing out in the deal.
5. Reduce credit terms for businesses that keep paying late – It may be worth considering tightening the payment terms for repeat offenders, but try to find out the reason for late payment before going ahead with this step; you may be able to come to a mutual agreement with the client. Remember also that non-paying customers are not customers at all, you could consider simply not supplying those who refuse to pay.
6. Work closely with your customers – Getting to know your customers, the way that they work and their specific requirements may help to reduce late payments. If you understand the business that you are supplying or providing a service to, you are more likely to establish a working relationship that will suit you as the supplier and your customers.