Benjamin Davies, a debt recovery solicitor with over 13 years of experience at Weightmans, explores three crucial steps for small businesses to be able to protect themselves from late payments, ensuring cash flow isn’t negatively impacted.
During the summer, the late payment of invoices hit a post-pandemic high. This caused significant strains on small companies, alongside the already challenging backdrop of a weak economy with stagnating growth. For SMEs, getting paid on time is a matter of survival. With less capital and tighter margins, late payments can significantly affect small business cash flow.
Research conducted by accountancy firm Xero quickly revealed that payments were made, on average, more than a week late between April and June this year. Retailers and hospitality businesses were particularly hard hit by these delays. Small businesses typically had to wait a whopping 29 days to be paid for their services and products.
In light of this growing issue, Benjamin Davies, a debt recovery solicitor at Weightmans, explores what small businesses can do to protect themselves from the growing epidemic of late payments.
Understand your legal rights and leverage existing legislation
Many small business owners may not be aware that legislation exists to support them in chasing overdue debts.
For instance, the Late Payment of Commercial Debts (Interest) Act 1998 lets businesses charge interest on overdue payments which are due from other businesses as well as the right to claim compensation for the costs of collecting these debts.
Whilst the Prompt Payment Code (being the existing voluntary scheme where businesses agree to pay their suppliers on time) will be replaced later this year, its successor, the new Fair Payment Code, will require businesses to prove they have met good payment standards before being awarded a suitable code status (gold, silver or bronze).
Additionally, the government is bringing forward new legislation in the coming weeks, requiring all larger businesses to include payment reporting in their annual reports, with responsible directors of non-compliant companies facing criminal prosecutions.
Together, a wide range of tools and data are available to small businesses, which can assist them in managing and assessing the risk of a creditor making a late payment at the outset of the trading relationship.
Implement strong internal processes
Making sure your business has solid processes for handling invoices and payments is a must. For starters, don’t wait too long to send out your invoices—do it as soon as the contract allows and make sure to use the agreed delivery methods. Additionally, businesses must make sure to invoice the correct legal entity and address any disputes or issues promptly to allow the business more time to assess its options.
Even with all the diligence in place, sometimes invoices still end up overdue. That’s why it can be useful to have someone in your business whose job is to chase up late payments promptly. This person should also make sure to reach out to customers in writing, reminding them of your right to claim interest and compensation under the Late Payment legislation.
It’s also important to do credit checks on the companies you work with – this can give you valuable insights into their financial health, helping you avoid those that might not pay up. This is a crucial step to minimise the risk of late payments and should be refreshed regularly when dealing with repeat customers over a lengthy period of time.
Take legal action when necessary
Dealing with debt can be daunting for small business owners, especially when they are not experts in the field. Legal action, while often seen as a last resort, is always an option. It involves time and effort, but when it comes to maintaining cash flow and ensuring payment for services rendered, it can be necessary. Having a retained firm of solicitors can provide the expertise and support needed to navigate such situations.
It’s undoubtedly a tough environment for small businesses. With soaring costs making healthy cash flow more important than ever, late payments can jeopardise SMEs’ very survival. While these steps won’t solve all the problems, they will help ensure that businesses get paid for their work and safeguard their future growth. In a period where economic growth is essential, protecting small businesses from the devastating impact of late payments is more important than ever.
