How small businesses can deal with late payments

Many UK small and medium sized business (SMEs) suffer from issues of late payments from customers. Small business owners across the UK are struggling with cash flow and keeping their businesses afloat.

Late payments have a significant impact on cash flow and take up a lot of time and effort in chasing for payment. Effective credit control and our tips in this blog can help you to be in better control of late payments. Bad debts can mean you struggle to survive and ultimately can lead to your business failing.

Read our blog to find out how to stay on top of unpaid invoices, cash flow and late payments and bad debts in your business.

The scale of the late payment crisis

Research by the Federation of Small Businesses shows that 400,000 small firms are threatened by late payments.

So, how do you keep on top of this challenge as a business owner and avoid overdue payments becoming a major issue in your company?

How can I avoid late payments?

Undertake credit checks

Your processes should kick in even before someone becomes a customer. Running a credit check to assess a potential customer’s credit history before you do business with them may flag issues. A credit check will show if they have a history of late or missed payments. This will be a red flag and help you to make a decision whether to take the risk of doing business with them.

Agree payment terms up front

Before you start delivering work, you need to agree payment terms with your customers. That way you can chase any delayed payments promptly and deal with outstanding invoices as soon as they hit the payment date deadline.

It’s worth considering and writing in your terms and conditions that you will charge interest on any late payments.

Issue accurate and prompt invoices

Late invoices will cause you cash flow issues, so invoicing promptly is key. You could choose to invoice at the end of each month, but for many small businesses this can cause cash flow issues. As a small business owner, it is better to invoice as soon as work is delivered.

It’s easy as a small business owner that has many administrative tasks to make mistakes when invoicing customers. Missing key details off your invoice could delay payment and cause additional work for you and your customers.

What to include on your invoices

Your invoice must include:

• a unique identification/invoice number.
• your company name, address and contact information.
• the company name and address of the customer you’re invoicing.
• a clear description of what you’re charging for.
• the date the goods or service were provided (supply date).
• the date of the invoice.
• the amount(s) being charged.
• VAT amount if applicable.
• the total amount owed.

Sole trader invoices

If you’re a sole trader, the invoice must also include:

• your name and any business name being used.
• an address where any legal documents can be delivered to you if you are using a business name.

Limited company invoices

If your company is a limited company, you must include the full company name as it appears on the certificate of incorporation.

If you decide to put names of your directors on your invoices, you must include the names of all directors.

VAT invoices

You must use VAT invoices if you and your customer are VAT registered.

These include more information than non-VAT invoices.

Some customers may need you to quote their purchase order number on your invoices, so they can easily identify it. Ask your customers if they require this and if they do, ensure you include that in your invoice details.

Provide a variety of ways to pay

Giving your customers a choice of payment methods or making it easier to pay will help to ensure you get paid for the work you have completed.

Ensure all your bank details and payment options are on every invoice you issue for customers to easily transfer money and pay you. Consider offering other payment options such as PayPal, Klarna and credit card payments.

Direct debit can be a great option if you are helping your customers to spread the cost, or you do regular monthly work that is the same cost every month.

How do I deal with late payments?

1. Set up effective credit control

It’s easy to say tighten up your credit control processes but what exactly does that mean? Poor practice on your credit control can lead to much larger issues, so here is our advice on improving your credit control processes.

2. Use online accounting software

Modern cloud based accounting software such as Nomisma that dns accountants offer (rather than manual spreadsheets or hard copy ’books’) will help you to ensure accuracy of your invoicing, can help with the payment process and also help you to manage and chase bad debts.

3. Build good relationships

Developing good relationships with your customers can not only avoid overdue payments in the first place but can help when you come to pick up the phone to chase late payments. For larger businesses, it can be harder to build these types of relationships but for smaller businesses, these types of solid relationships can often make the difference around being paid or not.

If you maintain a good relationship with regular communication and you set clear expectations about how much you charge and when you expect payment, it should help if you have to chase for payment at any point in time.

4. Send regular reminders

Sometimes payment deadlines can be missed due to staff shortages, technical errors or just human error of an invoice being missed. Regular reminders can help to ensure you are paid on time.

A quick phone call can be the easiest way to resolve an issue. Always be polite but to the point. Be clear on the date the invoice was sent and when payment was due. Often talking to the customer is more effective than an email that they claim they haven’t seen.

Many of today’s online accounting software systems can automate reminders, which is great, but often a more personal touch can be effective.

If all else fails, consider debt recovery

If you’ve sent reminders, called a customer and they don’t pay, then you should consider more formal action or debt recovery options like below.

Credit hold

The first step to prompt a customer to pay is to stop doing any work for them until their outstanding debt is paid to you. Often this can solve the problem if the customer requires more work from you. If this still doesn’t work, then you should consider the other options below.

Final notice

The final notice should be a last piece of correspondence you send to a customer before you begin legal proceedings. This conveys a serious nature to the problem and should give them a clear deadline to settle debts with you before you take legal action.

Legal action

Your last resort is to begin legal proceedings against the customer in question. There are companies online that offer this service. Depending on the amount your business is owed you can pursue legal action in the ways below.

Small claims court: The small claims court allows you and the customer to mediate to reach a satisfactory conclusion. The court will usually order the customer to repay the debt, interest and legal fees.

Debt collection: The other legal option is to use a debt collection specialist. Debt collection agencies are companies who specialise in collecting debts where the original creditor can’t get arrears repaid. There are a wide variety of debt collection agencies.

Debt collectors usually work in the following ways:

1. You sell or ‘assign’ your debt to the collection agency: You sell the debt at a reduced amount, so you get a lump sum of money. The collection agency becomes the legal owner of the debt and makes their profit by collecting the whole amount from you.

2. You use a collection agency to collect the debt on your behalf: The collection agency will normally be paid a percentage of the money they collect.

Summary

Being paid late can create huge problems both with cash flow and with the time it takes to chase payments. You have every right to take further action to ensure you get paid for the work you undertake. This could be as simple as chasing your customers, charge interest on overdue payments or take legal action if the payment is long overdue.

Staying on top of customers payments, chasing money overdue and managing late payments is an important part of managing your business cash flow. It can seem daunting as a small business to chase large customers for payment. Late payment remains a huge issue amongst UK small businesses and without proper management and control it can lead to a lack of cash flow and even business failure.

If you need help or advice on managing late payments or want to consider how online accounting can help you and your business to manage cash flow contact our team on 03300 886 686, or email on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.