12 April 2022

Effects of late customer payments on SMEs

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One of the biggest challenges for small business owners is getting their customers to pay on time. The problem of late payments continues to burden SMEs across the UK, with the blame largely being placed on the poor payment practices of larger businesses, as well as on Government contractors.

Often, customers pay invoices late with no justification, particularly when smaller companies are dealing with larger organisations. SMEs are particularly affected by this since they are less likely to have the cash reserves to cover the funding gap and may have offered generous terms to secure business. In many cases, when dealing with large companies, there may be a 90-day minimum credit term, making it difficult for an SME to effectively manage its cash flow whilst waiting for payment. But the lure of a big-name customer can sometimes be too tempting.

Paying late often goes under the radar, perhaps because of its prevalence, or because customers not paying has a stigma attached to it, but the effects can be catastrophic. In many cases, owner-managed businesses will have turned to personal cash and assets to cover the deficit, such as overdrafts and loans to cover the pending money. An estimated 50,000 businesses cite late payments as the cause of their failure every year.

Due to late payments from customers, cash flow issues can also affect a SMEs ability to pay their own suppliers, damaging the relationships they have worked hard to establish.

In addition to affecting every aspect of the business, late payments prevent investment in innovation and staff.

How can you prevent late payments?

While there is currently no way to cut out late payments entirely, there are methods small businesses and SMEs can implement to try and prevent late payments happening in the first place. Here are some effective strategies to consider:

Accuracy and Clarity

When raising invoices to your customer, make sure that the information on there is accurate, complete and clear. If your customer sent you a purchase order be sure to add that into the invoice, itemise as much as possible and make the price stand out. It gives customers a great excuse for delaying payment when invoices either omit information or are difficult to read and process.

Set out a credit control process

Businesses should make sure they send monthly statements to customers and develop a follow-up strategy for chasing up on payments that are several days or weeks late. Sending a reminder a few days before a payment is due doesn’t hurt, just ensure the wording is appropriately toned. Politeness encourages goodwill from your customers, which means you are more likely to receive your payment on time.

Ask for up front or staggered payments

If your client is new, you may want to request payment upfront, or charge a 50 percent deposit with the balance due upon completion, depending on the size of the project. In your payment policy, make sure you clearly state which strategy you plan to use.

Construct a firm payment policy

Introduce a firm payment policy into your terms of service, ensuring that all customers thoroughly understand them before making any purchases. Clearly explain the terms of payment (due in 30 days or 45 days, etc) and the consequences of late payments on your bills and invoices. Avoid using vague terms and general phrases such as “due in four weeks”. If you decide to charge a late fee for bills paid past the due date, you can even add a ‘late payment policy’ to your bills, encouraging those slow-moving clients to pay promptly.

What can you do if you’re experiencing late payments?

Communicate

Communicate with your customers. Not only will this build a good relationship, but it can also contribute towards efficient, smooth transactions.

  • Send chasing requests pointing out due and overdue values
  • Confirm that there are no queries on the invoices. If there are, resolve as quickly as you can
  • Secure payment dates in writing by email if you can
  • Have a telephone conversation. Speaking from experience, human to human interaction in a situation like this can assist with the resolution

Send a letter before action if other communication isn’t working

Sending a final letter before further action is a final demand and shows that you are serious about recovering the debt. There are many templates available online free of charge. This final letter does not have to be sent by a solicitor.

Contact the Small Business Commissioner (SBC)

The SBC is an independent public body set up in 2016 by the UK Government to tackle late payments and unfair payment practices within the private sector. If you are struggling with outstanding late payments, contact the SBC directly.

What is being done to help SMEs tackle late payments?

Established in 2008, the Small Business Commissioner introduced the Prompt Payment Code, (PPC), a voluntary code of practice for businesses to sign up to. When businesses sign up to the PPC, they agree to:

  • Pay suppliers on time within agreed terms
  •  Give clear guidance to suppliers on terms, dispute resolution, and prompt notification of late payment
  •  Support good practice throughout their supply chain and encourage others within it to adopt the PPC

Those working under the code must ensure that 95% of invoices are paid within 60 days, reducing to 30 days if their supplier is an SME with less than 50 employees.

The National Federation of Self Employed & Small Businesses, (FSB), set up their Fair Pay, Fair Play in 2019 to combat larger companies paying SMEs late or demanding unrealistic credit terms. This was set up as a result of the collapse of Carillion in 2018 which highlighted the impact of large customers’ late payment practices within a massive supply chain made up of SMEs. The FSB offers advice and support for SMEs struggling with a late payments culture.

For further advice and guidance with late payments, there are many resources available online.

At Clearview we specialise in straightforward thinking to help and support your business.