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Tackling late payments: Five top tips for SMEs

on Monday, 16 August 2021. Posted in Finance

As we move out of the pandemic, it’s fair to say that cash flow management has never been more important. However, one major threat that has the potential to wreak havoc on business cash flow, is overdue commercial debts.

Tackling late payments: Five top tips for SMEs

As we move out of the pandemic, it’s fair to say that cash flow management has never been more important. However, one major threat that has the potential to wreak havoc on business cash flow, is overdue commercial debts.

Whilst late invoice payments have always been a problem for small businesses, Covid-19 has exacerbated the issue and resulted in businesses waiting even longer to receive money owed. 

On July 1, changes to the Prompt Payment Code (PPC) came into effect. The code reforms were put in place with the intention of ‘strengthening the position of SMEs when it comes to being paid on time.’

Under the new amendments, all signatories must pay 95% of their invoices to small businesses within 30 days. As well as this, they now have to recognise their suppliers’ right to charge late payment interest on overdue invoices.

These measures form part of the drive working towards eliminating late paying debtors and helping SMEs go from strength to strength. But with unpaid invoices responsible for the closure of over 50,000 UK businesses a year, how can businesses best protect themselves? 

Know who you’re working with 

Whilst you can’t always predict who will be a late payer, it’s better to err on the side of caution when working with new clients. In this day and age, it’s easy to do your due diligence and find out as much as you can about a customer or client before agreeing to work with them.

Consider conducting credit checks to identify potential financial red flags. Platforms like Experian and Credit Karma provide a way of checking for creditworthiness, helping to determine the amount of risk said client could pose to your business. 

Things like CCJs and bankruptcy filings are included in credit checks, and it’s these insights that can help you spot companies you should probably avoid doing business with. After all, forewarned is forearmed. 

Don’t be laid back about payment terms

All too often, businesses start work without setting out clear payment terms. Unfortunately, a verbal agreement is simply not enough. You need to establish payment terms and timeframes in writing and ensure this is mutually agreed upon to avoid confusion and dispute. 

Invoices are not contracts in a legal sense. For this reason, it can also be wise to ask customers to sign a credit agreement or contract. This eliminates any room for misinterpretation and will prove extremely helpful  in the event you have issues collecting payment and are forced to seek legal action. 

Consider invoice finance solutions 

Waiting for invoice payments to come through can seriously impact a business’s working capital. Whilst the standard rule is 30 days from the invoice date, businesses are often left waiting far longer than that. To help avoid this, invoice finance providers offer the option to fund customer invoices in return for a fee. 

When an invoice gets sold in advance, the gap between completed work and received payment reduces significantly. This is because invoice finance facilities are able to release the invoice amount in hours if not days. 

This type of cash flow solution is proving popular with SMEs. Throughout the pandemic, alternative finance providers offered £9.2 bn in funding to UK businesses, and around two-thirds of this came from debt-based funding. 

Previously, invoice finance suppliers asked for long term commitment, requiring businesses to raise their whole sales ledger. The rapid rise of fintech startups has resulted in an increase in more flexible solutions that facilitate selective invoice finance. This means that SMEs can access invoice finance for the odd invoice here and there, as and when they need it more. 

Stick to a payment schedule 

As with anything in business, organisation is key. A schedule can be used to help you keep track of your company’s invoices. To keep things simple and ensure no one slips through the cracks, stick to a standard timeline for following up on customers. By sending out email reminders, you will keep your business and its products or services at the forefront of customers’ minds. 

As a general rule of thumb, check in with your customers between 7 - 14 days after sending out the invoice. In your communications, you can ask them whether they have any questions about remuneration and provide helpful links for online payment. It’s always a good idea to offer customers lots of options and make paying as easy and convenient as possible. 

Follow through on your terms 

Pursuing money that’s owed to your business can be a daunting thought, but it shouldn’t be. Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses are entitled to charge statutory interest fees when a customer is late in paying for goods and services. 

Your next steps will depend on your contract terms, but generally speaking, if you don’t receive payment by the deadline, your first port of call is to send a statement of account. This document indicates the transactions that have taken place between you and your customer over a period of time. It can be a good starting point for reminding your customer that the due date has passed. 

In the event you still don’t receive payment, you can go on to issue a Letter Before Action (LBA). After this, your customer will have seven days to make payment before you can choose to submit a claim and settle the issue in a small claims court. 

This article is brought to you by Penny. Headquartered in Hampshire, Penny’s online finance platform is used by thousands of UK SMEs to instantly accelerate their invoice income.

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