Tackling late payment: First-hand advice from small businesses

In this article in association with the Federation of Small Businesses, we look at how businesses are managing the problematic situation of being paid late.

Late payment is a constant thorn in the side of many small companies. Cash is king, particularly for businesses of modest size, and not getting paid promptly can mean spiralling into insolvency and being put out of business.

For a study undertaken earlier this year by the Federation of Small Businesses (FSB), FSB members were asked to give reasons why their customers paid late. The top five reported reasons were: no excuse or justification was given (49 per cent); internal invoice processing issues caused a delay (35 per cent); the customer extended the payment terms without your consent (34 per cent); invoice was lost or misplaced (33 per cent); and invoice was never received (31 per cent).

Martin Campbell, managing director of data company Ormsby Street believes that one of the biggest mistakes a small business can make is to assume that their customers can pay and will pay on the terms they agree.

‘This is rarely the case and late invoice payment leads to cash flow issues, which can prevent growth or even threaten the existence of a small business,’ he says.

‘I’ve seen funding alternatives suggested, especially invoice finance, as the answer to this problem, but invoice financing in reality only addresses the symptom – not the disease of late invoice payment itself. Small businesses need to take control of the situation themselves.

‘Prompt invoicing is important and a small business should never be shy about chasing unpaid invoices. But the most effective way of addressing late payment is to look into the financial health of the company you are trading with.’

Transparent payment terms

Mariah Tompkins, director of WKM Accountancy, encourage her clients to explain the terms of payment and how late payments will be managed at the agreement stage.

‘Being transparent at the beginning of the agreement will ensure that both parties fully understand the payment structure while minimising the risk of late payments.

‘Alternative methods of avoiding late payments include offering different methods of payment to suit your client i.e. BACS or cheque payment and always providing your bank details while issuing invoices as this will prevent any late payment excuses,’ she adds.

Encouraging clients to pay via direct debit by offering them an incentive or discount will ensure the invoice is automatically paid on the due date and the client receives a reward for choosing to use this method of payment.

‘The business could introduce a charge for late payments or use a debt collection company to deal with outstanding payments although this will come at a cost and should be used as a last resort,’ Tompkins says.

Monica Karpinski, content marketing manager for Curated Digital, says her company recently had some trouble with a client who failed to pay for 3-4 months, and refused to update a contract. After efforts to have them pay the amount, Curated Digital suspended work on the account as it was no longer viable to continue spending time on it.

‘Eventually, we decided to retire the account, at which point they changed their point of contact who was working with us, and resolved to pay the outstanding amount and sign a contract,’ Karpinski says.

There followed a review, and talk of a contract, and they finally paid a portion of the overdue amount. ‘As part of the review process, we prepared a brutally honest, lengthy report on their performance recently (the period where work was halted), and have effectively left the ball in their court for ways in which they’d like to work with us in future,’ adds Karpinski.

Glyn Shemwell, founder of cleaning management company wecleananyhome.com has suffered badly with late payers. ‘Our profit margins are very small and as the cleaners on our books all get paid weekly our poor cash flow caused by late payments nearly put us out of business,’ he says.

‘I found that, despite having a good relationship with our clients, chasing them for payment was always an issue and indeed a number would get annoyed if we tried; we certainly lost a few clients through this.’

A technology solution

Shemwell has addressed the issue by taking on the services of GoCardless, which has made collecting clients payments very easy for both the clients and his company.

‘We approached all of our existing clients explaining that we were switching to this method and explained to them that the reason for this was so that we could keep their weekly payments down whilst insuring that their cleaners still earned the majority of the payment.

‘Interestingly all but a handful were more than happy with this but the few who refused are still problematic payers,’ Shemwell adds.

FSB national chairman John Allan says, ‘If businesses do not get the money they are owed, they may not be able to pay their staff, invest in their business or pay their own suppliers. There is a knock-on effect right down the supply chain, which undermines the UK economy as a whole.

‘Despite increasing public outrage at the mistreatment of smaller suppliers by their larger customers, the UK’s payment culture continues to get worse. In addition, to strengthen the Prompt Payment Code there needs to be a cultural shift to improve payment practices. To tackle poor payment culture it has become clear that we need an independent inquiry which should report before the end of the year.’

The Federation of Small Businesses is the UK’s largest campaigning pressure group promoting and protecting the interests of the self-employed and owners of small firms. Formed in 1974, it now has around 200,000 members across 33 regions and 188 branches.

Further reading on late payment

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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