Late Payment Culture
Preventing late payments
It's important for all small businesses to manage and reduce the risk of late payments from customers.
Small enterprises are especially vulnerable to the effects that late payment can have on cash flow, profitability, and ultimately the viability of the business.
There are several methods you can adopt to avoid falling victim to the ‘late payment culture’, and these are considered below.
Credit check customers
Many small businesses simply don't think of doing this, perceiving it to be something only larger organisations do.
But if you fail to make even the most basic checks on customers this could leave your business at risk of late or even non-payment.
You can minimise the risk by conducting checks with the customer’s bank, a credit reference agency and some of their suppliers. Additional information can easily be obtained from Companies House if your company is a corporate entity.
We have actually refused to take on some customers following a quick check on Facebook and local newspaper websites, which can sometimes give you some surprising background on your potential customer!
It is also wise to be aware of a customers’ payment trends on an ongoing basis, as this often alerts potential problems before they can develop into something more damaging.
Terms and conditions
Clearly display all your terms and conditions for payment on all documents sent to new and potential customers.
Terms must clearly state the due payment date for any sales invoice – it's commonplace that settlement is expected within 30 days, although you can vary this depending on the type of business you operate.
Encourage early payment
To improve the number of customers who pay on time you might offer a small discount for the early settlement of bills.
Or if a customer is having genuine problems making their payment, you could negotiate a deal with them.
Invoice on time
This might sound strange but many businesses delay sending invoices.
The knock on effect is that the customer automatically receives a longer time to pay than you intended, and also could get the wrong impression and think you aren't in a hurry to be paid!
Late payment legislation
This refers to the Late Payments of Commercial Debts (Interest) Act 1998, the Late Payment of Commercial Debts Regulations 2002 and the Late Payment of Commercial Debts Regulations 2013.
This provides a statutory right to claim interest and other compensation recovery costs.
It's optional whether or not you choose to make use of this regulation but remember that customers who fail to pay you can put the viability of your business at risk. Enforcing your agreed payment terms will protect your business in the long term.
New payment reporting procedures for large businesses
From April 2017, large businesses and limited liability partnerships (LLPs) are required to publish details on how quickly they pay their suppliers. The new measures require large firms to publicly report twice a year on both their payment practices and their performance, including the average time taken to pay supplier invoices.
The government hopes the new measures will help to ‘increase transparency’ and assist small businesses in making ‘informed decisions’ as to who they do business with.
Payment reporting by larger businesses
From April 2017, large businesses are required to publish details on how quickly they pay their suppliers.
Public reports are required twice a year on both payment practices and performance, including the average time taken to pay supplier invoices.
The government hopes this will help to increase transparency and assist small businesses to make a more informed decision about who they do business with. Time will tell if it is effective or not.