The best ways to deal with late payments in your small business

I read a report recently from Simply Business that headlined “SME Insights Report: UK small businesses owed £32bn in late payments”. Even at a fraction of this; the amount is staggering. But working with small businesses across the globe, this is such a massive problem and compounded by other cash flow mistakes. Often this is because there is a lack of education at an entrepeneurial level about general cash awareness in the business.

 

Getting real about late payments

 

 

Most businesses irrespective of size want to do the morally right thing and pay people on time. Our own personal experience is that businesses priortise small companies for payments once they pay employees and key suppliers. It’s when they don’t have enough to spare after paying employees and key suppliers, there is a real issue.

 

How do we best manage this? While there is no easy answer, here are a few pointers that can be easily managed by most SMEs.

 

This is not so prevalent with small companies but worth a mention. If you’re dealing with a larger company and they ask to follow a certain process, such as submitting your invoice to a specific portal they use (very common for US companies to request this); do it. You can chase all you want but you won’t get paid unless it passes through their system.

 

If they ask you to attached a PO or a reference like a job number, do it. Because without these, your invoice won’t move through their system and you won’t get paid on time. This is a painful process and time consuming for most small businesses but better than waiting endlessly on payment for a small admin issue that could’ve been avoided.

 

 

Most small businesses have this issue. They DO NOT explain the consequences of non-payment clearly. You need to spell this out in as many clear words as humanely possible.

 

– Include this in the invoice itself: Non-payment would attract late payment penalties of xxx or interest @ xxx

 

– Include this in the body of the email that goes with the invoice itself. You can automate this message in almost all invoicing software

 

– Reiterate this in every formal email / communication you have with the debtor when asking them for a payment date if already late

 

– If you’re still getting no response at all, define clearly the actions you have in your debt collection sequence such as handing it over to an external debt collection agency, reporting to the likes of credit agencies etc.

 

– The important thing is to follow these actions through so that a level of seriousness is attached to your debt. There are a number of debt collection agencies that work on a no win no fee basis. You could also otherwise try the MCOL process with HMRC.

 

If you have an agreed credit term with a client, adhere to that when you fill in a due date on your invoice. In circumstances where you cannot afford to wait more than a certain period don’t agree to payment terms that are detrimental. I know that’s easier said than done. Sometimes the sale itself is too important and you simply don’t have negotiation power. That’s all right, try to extend the same terms then to suppliers so you’re not compromised on both ends.

 

A client had a large company come onboard who negotiated a 60-day term. The standard was 30 days. In this case, the client could afford to wait the extra 30 days but no more. We are hot on their heels even if it’s a day overdue. And as standard good practice, we send a gentle reminder of invoice becoming due in 7 days a week before. This has worked well and we’ve not suffered late payments from this arrangement.

 

If you know a supplier’s payment patterns – such as they adhere to a weekly or bi-weekly payment make sure you send reminders with enough time for them to get your payment on an upcoming run. There is no point sending a reminder on the 14th if the 15th is their payment date. You’ve already potentially missed the window to be on their mid-month payment run.

 

Look for indications in their communication to you where they might allude to when payments are made. As a thumb rule, the month-end is a bad time to ask for payments as most companies have to prioritise payroll and contractors.

 

When you’re not getting responses from your general finance contact, escalate to the next available senior person. That could be a CEO / COO themselves for small companies.

 

If larger, it could be your product contact there. This can be an effective strategy in the sense that more people from a supplier’s company is pulled into an admin matter. Most companies like to avoid this.

 

This is a simple but effective strategy. People are less evasive on the phone. You’ll get to the heart of the matter faster when speaking with someone. This is also one of the most effective escalation methods.

 

A client had a late payer with over £20k across 3-4 invoices pending for over 30 days. There was no response to the emails, we tried her on the phone just before 9 AM on a weekday morning. She was very apologetic and mentioned it was overlooked due to other priorities. She paid 50% the very same day and the other half within the next 2 weeks.

 

We don’t always know why people don’t pay. If they haven’t raised disputes or product issues, we recommend this 5-step plan to get to the heart of the matter fast.

 

 

Struggling with payments, we provide one-off consulting to deal with late payments in your small business. Please don’t hesitate to speak with us.

 

References and notes

 

  1. All pictures used are either proprietary or courtesy of pexels.com
  2. https://www.simplybusiness.co.uk/knowledge/articles/sme-insights-report-2023/
  3. https://www.gov.uk/make-court-claim-for-money/after-you-make-your-claim

 

 

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