How late payments affect your SME

NatWest Business Builder

Late payments have a huge impact on SMEs’ ability to grow. Here’s how to combat late payments to ensure your business isn’t compromised.

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The Federation of Small Businesses (FSB) has found that 84% of small businesses have been paid late for a product or service, while Siemens Financial Services reports that late payments cause UK SMEs to miss out on £250bn of liquid cash flow that they need in order to grow their business.

There are 5.7m SMEs in the UK, making up more than 99% of all businesses and 47% of all private sector turnover, so late payments are harming the UK economy overall and SME growth is being undermined. The Siemens report said 23% of SMEs found late payments had put them at risk of closure.

Meanwhile, figures from Bacs Payment Schemes, suggest the total amount owed to SMEs last year was £14bn, with more than a third of UK SMEs stating they’d been forced to wait much later than agreed terms before receiving payment.

What is the impact of late payments?

In the Bacs survey, 20% of SMEs said that being owed between £20,000 and £50,000 would be enough to drive them into bankruptcy.

“We have clients who’ve been unable to pitch for new business as they’ve been unable to purchase components or pay staff,” said Rachel Craft, marketing manager at financial consultancy Regency Factors.

And being paid late means SMEs are forced to pay their own suppliers late.

“Late payments are usually due to a payment chain,” says Jana Dowling, founder of social enterprise the 888 Collective. “We work with people who are reliant on larger companies to pay them. Without them being paid on time, ours can’t come through.”

Why are payments late?

SMEs suffer from late payments disproportionately to larger companies because they’re towards the end of the supply chain. Siemens found SMEs with an annual turnover of less than £1m wait 72 days on average for payment, which is 50% longer than large businesses, which have an average waiting time of 31 days.

The biggest reason for late payments is the tactic of larger companies, which often demand 90-day payment terms from their smaller suppliers.

“Some late payments are due to system errors, supply chain issues or a company crisis,” says Stephen Paynter, finance director at online accounting software firm Crunch Accounting. “Regardless, the money is owed, and should be paid within the agreed terms.”

However, Paynter points out SMEs have the same rights as larger firms when it comes to receiving what they’re owed.

“They can issue the same penalties for overdue invoices in line with their contracts or the protection provided under the Late Payment of Commercial Debts (Interest) Act 1998,” he says.

How to tackle late payments

Following clear guidelines for invoicing and collecting payments helps. Make your credit control function a way of taking back control of your cash flow by applying the right techniques to get paid quicker.

Undertake a rigorous credit check on new customers to limit future risks before then agreeing payment terms. “Be firm from the outset about payment terms and undertake due diligence before agreeing to the job,” advises Craft.

“Honesty is best practice. Your customers value you and have engaged you to provide your service. You’ll be surprised how many people will look after you when you’re honest with them”

Jana Dowling, founder, the 888 Collective

Set out invoices clearly and accurately. An error provides creditors with a reason not to pay and extends the payment collection process. Invoices should include your terms of business, due date, how to pay and details of the service, including order numbers, invoice number, date, addresses and amounts, including VAT if applicable.

Raise and send invoices promptly. Phone a few days later to check it’s been received and accurate and confirm the contact who signs it off for payment because they’ll be the one to resolve any problems.

A week before the invoice is due, contact the customer to confirm payment is on the next payment run. If there are problems, find out what these are and try to resolve them.

“It’s always awkward chasing for payment, and for SMEs it wastes time, so use payment reminder systems,” suggests Paynter.

If a customer is persistently late paying, you could put them on ‘credit stop’, denying them products or services until they’ve paid. But bear in mind this risks jeopardising sensitive business relationships – they might be waiting on late payments, too.

Dowling says: “Honesty is best practice. Your customers value you and have engaged you to provide your service. You’ll be surprised how many people will look after you when you’re honest with them.”

Other potential solutions

Running a sales ledger and credit control function that incorporates best practice with experienced staff is an option, but if you’re a very small business, outsourcing to a specialist frees up your time to build the business.

Invoice discounting is another possibility. This involves using your unpaid accounts receivable as collateral for funds advanced by a finance company before invoices are paid. Typically, you receive around 80% of the value in advance and the rest after the invoice has been paid. It can unlock funding for a growing company, but there are obviously fees incurred.

Factoring is another fee-based option. It’s a type of debtor finance in which a business can sell its accounts receivable balance to a third party at a discount, leaving the third party to get payments in.

Alternatively, you could offer a small discount or incentive for payment of invoices within seven days.

“Late payers could be willing to pay you faster if it’s a requirement for service,” said Alan Laing, MD at accounting and payment systems provider Sage UK & Ireland. “Automating the process through e-invoicing makes it easier for customers to pay and eliminate obstacles to getting paid on time.

What benefits does incorporating best practice provide?

“I always assume payments will be late,” says Dowling. “SMEs should build a late payment system into their cash flow. Then late payments have less impact on growth.”

By running your sales ledger and credit control departments effectively, you can reduce problems caused by late payments.

Delegating credit control, even for a small business with low overheads, can help, says Lindsey Fish, founder and CEO at events management business Mums Enterprise. “I hire a VA [virtual assistant] to help manage credit control duties. They can act quicker and be firmer when chasing,” she says.

Tackling late payments: a checklist

1. Conduct a full credit check on new customers to enable you to make sensible decisions on credit agreements.
2. Set out clear terms and conditions in sales contracts to clarify how your payment terms operate.
3. Set a credit limit that’s right for your business, not necessarily the maximum it suggests on a credit report. The credit limit can start low and rise once the customer has shown themselves to be reliable.
4. Outsource or employ the right staff for invoicing, even on a part-time basis if you are a low-turnover SME.
5. Pre-empt problems – check invoices are sent to the right person to be approved for payment before they become due. When it comes to chasing payments, your system needs to run like clockwork.
6. Consider stopping credit – chase late payers diligently and watch out for part-payments as this could indicate financial difficulties.

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