One in five SMEs are currently owed more than £25,000 whilst almost one in ten are owed a staggering £100,000 in late payments, according to the Zurich SME Risk Index. In its latest risk index, the insurer reveals that corporates higher up in the food chain are taking advantage of smaller firms that are dependent on their return custom. More than half (53%) of the 1,000 SMEs that took part in the survey said payments were delayed by larger companies.
The data also shows that almost half (45%) of respondents were frustrated by late payments and forced to wait up to three months to get paid whilst 14% were forced to wait up to six months. These figures against a backdrop where separate research by the Government indicates that 50,000 firms are being driven out of business in the UK each year because of late payment. So what can be done to protect businesses from reluctant payers?
Here are 5 Steps to Prevent Late Payments
(1) Credit Check Customers
It’s vital to credit check potential new customers as this can reduce uncertainty over whether invoices get paid. Credit checks provide a snapshot of the company’s financial standing in the form of a credit rating, which reveals whether there are any county court judgements against them and whether they have a history of non-payment. The high street banks provide credit-checking services for customers as do credit-checking agencies. Checks can also be made free of charge at Companies House. It’s important to ask customers for references and call them to check if they paid on time. This shouldn’t be a one-off, but a regular part of the process.
(2) Set Clear Payment Terms
Businesses must be clear about their payment terms to avoid confusion at a later stage. An invoice must include the terms and it’s a good business sense to talk them through with new customers. Business owners should make it clear that the business has a statutory right to claim interest on late payments at 8% over the Bank of England base rate. The business can also claim compensation for debt recovery costs.
(3) Make it Easy to Pay
Encourage customers to pay using electronic transfers or direct debt, rather than by cheque. According to Bacs Payment Services, cheques are a major source of late payment disputes, therefore, they are best avoided. Additionally, if the business is waiting for a particularly large payment, business owners should be proactive and call the customer or send an email to check whether they have received the invoice and that there are no queries.
(4) Respond to the First Late Payment Professionally
Always call the customer once an invoice is one or two days past due. Ask them if there are any problems and if they can provide an expected payment date. This process should be repeated if they miss the new payment deadline. If efforts to secure payment for goods or services supplied are frustrated do not offer further credit to that customer until the outstanding amount has been paid.
(5) Consider Invoice Finance to Improve the Cash Flow Impacts from Late Payments
Invoice finance enables businesses to clear one of the largest hurdles to business growth; late payment. By releasing the value tied up in unpaid invoices to a factoring company, the business receives a cash advance against the value of the invoices almost immediately. This means that the business can receive around 90%, sometimes even 100%, of the invoice’s value within 24 hours. As part of the process, the factoring company manages the sales ledger and credit control to improve cash flow. Another benefit is that factoring is extremely flexible and can adapt to the requirements of the business at the time, but it can also expand in line with growing sales.