18 July 2013

How to deal with late payments

Official figures suggest that small businesses are owed £30 billion in late payments, putting companies at risk of insolvency and job losses.

Late payments can make it difficult for small companies to make essential payments on time like rent on commercial premises or staff wages. It can also make financial planning difficult.

However, small companies are unlikely to publicly criticise larger companies because they will not want to lose their business.

Many large companies have blamed inaccurate invoices from smaller businesses for the delays in payment so MPs also want start-ups and SMEs to be given free financial management advice.

Call for fair treatment

MPs now want to introduce measures to force larger companies to reveal how long they take to pay their bills to smaller businesses. A cross-party Parliamentary inquiry has produced a report which recommends companies are made to publish performance data on the length of time they take to pay suppliers.

The inquiry has also called for ministers to work in partnership with businesses to create a Fair Treatment Charter. There may also be measures taken to strengthen voluntary codes like the Prompt Payment Code, introduced by the Institute of Credit Management.

The inquiry found that late payments were an issue for all industry sectors but particularly in manufacturing and construction.

Fair payment could also become a contractual requirement for new Government contracts. The report recommended the Government pay directly contracted firms paid within 14 days, sub-contracted firms within 19 days and those firms sub-contracted twice within 23 days.

MP Debbie Abrahams, who chaired the inquiry, says: “The public has grown tired of hearing about huge, greed-driven pay packets, pay-offs for failure and tax evasion. But allowing a culture of late payment to go unchallenged is another executive-level decision that affects ordinary, hardworking, people across the country.”

According to the Forum of Private Business, half of all SMEs – that’s 861,000 companies in total – experienced late payments during 2011. And companies not paying each other fairly and on time was costing businesses in the UK a total of £20 billion each year.

Protect against late payments

Here are our tips for protecting yourself against late payments:

  • Get to know your customer
    Do your research and make sure you know who your customer is and that they are a reputable business. Check you know the company’s exact name and legal status and don’t be afraid to look into them using Companies House WebCheck Service or obtain credit reference information.
  • Discuss and agree clear payment terms
    Don’t make assumptions about when you will be paid for a product or service. Make sure you draw up a clear agreement so you both know where you stand and include a payment due date on all your invoices.
  • Consider credit insurance
    If non-payment would be disastrous for your business, it might be worth looking into credit insurance to protect you against customers failing to pay or becoming insolvent.
  • Come up with a procedure for chasing payments
    Create a routine system for following up non-payment, which includes writing letters, sending emails and calling customers on the phone. Be polite but firm and persistent until you receive the money you are owed. If you have concerns about the customer, you may have to take more urgent action. Make sure you keep an accurate record of all your dealings with your customers in case there is a dispute and you need to produce evidence.
  • Take action if they still won’t pay
    If you cannot get a customer to pay their bill you may have to take legal action, either yourself or using a solicitor. Consider employing a debt collection agency to chase the debt for you. If the debt is more than £750, you can issue a statutory demand. If the bill still isn’t paid then you can follow up 21 days later with a bankruptcy or winding up petition. However, if they still don’t pay and become insolvent as a result, they are even less likely to pay you the money they owe.