It’s estimated that small businesses in the UK are owed on average £12,000 each because of late payments. The problem seems to be ingrained in the way in which the UK does business. Belgium, The Netherlands, Switzerland, Germany and Ireland have all experienced sharp falls in the value of invoices outstanding over the last five years; only the UK has reported little or no change in its payment culture.
The Small Business Minister, Margot James, has pledged to tackle this growing problem by appointing a commissioner, and requiring large businesses to report on their payment practices from April 2017. The Small Business Commissioner, when appointed, will no doubt be urged to make it a key objective to end what many are calling supply chain bullying, by naming and shaming those large organisations who routinely make small and medium-sized businesses wait an unacceptably long time for payment.
Current legislation states that the period for business payments should in normal circumstances not exceed 60 days. However, it’s regularly reported that the payment terms of some large businesses have lengthened to well over 100 days.
While more than 1,800 businesses have signed up to the Prompt Payment Code which commits them to paying invoices within 30 days, this is a voluntary code that has yet to be widely accepted and supported.
The scope of the problem
A report from the Federation of Small Businesses (FSB) shows that the impact of late payment can be devastating. 37 per cent of businesses surveyed have run into cash flow difficulties, 30 per cent have been forced to rely on an overdraft and a further 20 per cent say late payment has hit profits.
And it can be much worse. At the extreme end, late payments and resulting cash flow difficulties have caused businesses to fail. The FSB reports that in 2014, if payments had been received on time 50,000 business deaths could have been avoided, growing the economy by £2.5bn.
Taking practical steps
Many businesses feel powerless in the face of larger company customers who may represent a considerable chunk of their business. However, there are steps that can be taken to improve the late payment problem.
Your terms of business should be sent to the customer with your quotation or order acceptance, not with your invoice; this puts you in a much stronger position to chase up late payment with the accounts department. The Late Payment of Commercial Debts (Interest) Act 1998 means that businesses can charge 8 per cent above base rate on invoices that remain unpaid after 30 days.
Make it clear in your terms and conditions how and when you expect payment to be made. Check where and to whom you should send invoices and make all invoices payable on demand and send them promptly.
If payment becomes overdue, your first step should be to contact the debtor and chase for payment. Although this can be time-consuming, especially for smaller businesses, taking a proactive approach to getting paid can speed things along.
Be careful who you trade with; assume the worst until experience proves otherwise. When taking on new customers check out their payment record. Making checks can seem time-consuming, but so is chasing payment. Set appropriate credit limits for new customers until you’re confident they can and will pay you on time. Whilst you may choose to offer the standard 30 days’ credit, you aren’t obliged to. You could always request cash upfront if you are in any doubt.
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