The Impact of Late Payments and How SMEs Can Stamp Them Out

As the bugbear of any business owner worth their salt, the issue of delayed payment can prove a repeat offender when it comes to the many challenges of managing a start-up. However, it’s when a pattern begins to form that late payments pose a very real threat to the future of a business – causing a harmful blow to cashflow, and ultimately, the ability to bounce back. So much so that a recent study by business banking platform Tide revealed that CEOs, founders and directors of UK SMEs were currently chasing down a crippling £50bn worth of late payments; self-employed individuals were also found to be resolving up to four unpaid invoices at once, demanding one hour of their time every day. While it’s clear that businesses are struggling under the weight of late payments, the more pressing question would be: what can be done to avoid them?  We delve further into the impact of an overdue invoice, and the new legislation designed to help keep them at bay.

Late payments pose a very real threat to the future of a business – causing a harmful blow to cashflow, and ultimately, the ability to bounce back.

Disturbing the balance

 For business owners familiar with the recurrent problem of late payments, the impact goes beyond the fundamental issue of cashflow. Not only is time wasted chasing down outstanding invoices, but the admin associated with this task – as well as failure to better optimise current processes – can put extra strain on SME owners eager to get ahead. According to a report by Intuit QuickBooks, over half of payment tracking occurs outside of the working day – not only racking up more hours on the timesheet, but eating into precious time spent at home with the family. For this reason, late payments are pushing business owners to the brink in more ways than one, with the potential to cause harm both inside the office and out. Where cashflow is concerned, absence of funds owed can also impact a company owner’s personal circumstances – such as the use of loans or credit cards – when costs associated with both the everyday running and growth of a business mount up.

 

Late payment legislation

 The unpredictable nature of late payments – despite seemingly positive relationships with the client(s) in question – have the power to catch SMEs by surprise, often leaving business owners feeling out of control. In a bid to reinforce the power of small businesses in the UK, Labour peer Lord Mendelsohn put a Private Members Bill before the House of Lords this year, legislating a 30-day window (maximum) for all invoices to be paid; the Small Business Commissioner would then be in a position to issue fines to those not settled within that timeframe. Furthermore, these new measures would also prohibit other payment procedures, such as ‘prompt payment discounts’ or money off in exchange for a fast-tracked invoice, and other predatory practices such as charges associated with on-boarding.

Addressing the problem last year, the Association of Accounting Technicians (ATT) made recommendations that were then backed by 73 per cent of MPs in Parliament. These included payment terms to be halved to 30 from the existing 60 days, the enforcement of a financial penalty regime (aimed at those late on a regular basis) and the compulsory integration of the Prompt Payment Code (PPC) for SMEs with 250 employees or more; a code that represents commitment to fairer payment terms, administered by the Chartered Institute for Credit Management (CICM).

With 23 per cent of UK insolvencies caused by late payments, we take a look at what steps business's should take next.

 

What SMEs can do right now

 While government-backed legislation is supporting SMEs in the deterrence of late payments, what changes can business owners make in the short term to prevent the event of one too many? With 23 per cent of UK insolvencies caused by late payments, business should take the following steps:

  • Review existing payment terms and how they are being negotiated;
  • Ensure these are promptly addressed with any new clients moving forward;
  • Credit checks can also be made to help business owners decide whether they enter into contracts with those considered ‘high risk’ – read more about credit checks for businesses;
  • Seek to streamline the process of dealing with these occurrences – as opposed to solely focusing on prevention;
  • Aim to reduce the administrative time required to chase up a late payment, for example, adopting efficient accounting software – like Xero – can help carry the load and make payment tracking more transparent;
  • Cloud-based invoicing systems provide the option to pay online with a click, likely encouraging swifter payment from some clients.

Depending on the amount owed, it could be more beneficial to write off the debt and you may be able to deduct it for tax reasons.

 

What should you do if a client or customer continues to ignore their invoice?

  • Discuss the situation with your lawyer and accountant – depending on the amount, it could be more beneficial to write off the debt and you may be able to deduct it for tax reasons;
  • If you haven’t appointed a lawyer before, start by speaking to the Lawyers for Business helpline, and should you need an accountant, please contact us to discuss your situation;
  • Issue the invoice again and explain that you will start court proceedings if payment is not received within seven days;
  • After seven days, a Small Claims Court claim can be filed if the amount is less than £10,000;
  • If the payment is over £5,000 you are also entitled to serve a Statutory Payment Demand, which – if not met – will give you grounds to present a winding up petition in Court;
  • Hiring a debt collection agency should be your last resort, but if required carefully check terms and conditions and ensure the firm is registered with the Financial Conduct Authority.

 

From day-to-day accountancy services to the deployment of cloud software, Adams Moore offers tailored support to businesses wishing to improve financial efficiency within their business. To find out how we can help, email, call or drop into the office to arrange your free new client consultation.