More than 440,000 SMEs could be forced out of business in 2022 by the late payment crisis, according to the Federation of Small Businesses, which has called for urgent government intervention to improve the way firms are paid.
Late payment 'crisis' and what you as a small business can do to fight back
Small businesses are at the heart of our communities, employing 61 per cent of the workforce, and generating 52% of turnover. Yet, around 50,000 firms close each year due to cash flow problems. If larger businesses paid smaller suppliers sooner, more small firms would have the opportunity to thrive, create new jobs and boost our economy.
It can take 90 days or more for small businesses to get paid by larger corporates. During this time, small businesses need to pay wages, materials, shipping and all of their own business expenses. This is blatantly unfair. For one SME we work with, their biggest client completely ignores the firm's 30-day payment terms. What is more, upon payment, the client doesn't even pay the full amount, giving themselves a payment 'discount' for paying 'on time'!
How has a problem turned into a crisis?
30% of firms surveyed by the FSB saw an increase in the late payment of invoices in the three months prior to the survey. With increased national insurance contributions, business rates and Brexit admin, plus an increase in the National Living Wage and the energy cost crisis, late payment of invoices could be the final nail in the coffin for a small business.
“Late payment was destroying thousands of small businesses even before the pandemic hit – the pandemic has made matters worse,” said FSB National Chairman, Mike Cherry. “In the past, the government has rightly identified greater Board accountability as key to spurring change in this area, but delivery has been slow.”
The FSB wants every big business and government organisation to abide by the prompt payment code, arguing that 30-day payment terms should be “the norm for those who are committed to environmental, social and governance best practice”.
Policymakers need to understand that late payment is the issue that keeps thousands of entrepreneurs up at night, and one that has worsened in lockstep with lockdowns. We need to see words turned to action.
Mike Cherry, FSB National Chairman
So, what can you do about late payments?
- Pay it forward; prioritise paying your smaller suppliers on time.
- Join the Good Business Pays campaign: https://goodbusinesspays.com/ Started in 2021, the campaign aims to 'encourage the UK’s largest companies to fast track payments to small suppliers, helping them bounce back from the COVID-19 pandemic and injecting vital capital into the economy.'
- Don't feel bad about chasing your invoices! It's not rude to remind someone to pay you. You've done the work, now they need to pay you. If they don't, they are the one who is rude. Send an email, keeping your initial contact friendly and polite (i.e. Our invoice seems to have been overlooked / We don't seem to have received a payment for our invoice) and hopefully they will respond in kind. Chances are, they have simply forgotten to pay or the invoice hasn't been processed correctly.
- Ask for a partial payment upfront. Your clients might be wary of this, but if you have a good relationship with a client this is sometimes a possibility.
- Be clear about payment terms from the start. When you send a quote, it should state clearly when you want to be paid. By accepting your quote, a client is accepting your payment terms.
- Pick up the phone. It isn't fun, however a polite call is harder for them to ignore than an email. It's also easier on a call to find out why they haven't paid. It may be that they are also having cashflow problems, and perhaps you could take this opportunity to come to an agreement such as a future payment date or paying in instalments.
- Send regular statements. A polite email or letter accompanying a statement will let your client know that you would really like to be paid and that you're not going to forget they owe you. Keeping it polite and regular will not be considered as harassment. Is there a way you can easily automate the emails/statements which would reduce your stress and save you time?
And if those points haven't worked, try these:
- Charge interest. Unless you've agreed different payment terms, the law says the payment is late 30 days after either the customer gets the invoice or you deliver the goods/provide the service (if this is later). The process for charging interest is detailed here: https://www.gov.uk/late-commercial-payments-interest-debt-recovery. For B2B transactions, it's 8% plus the Bank of England base rate. You can also claim debt recovery costs of £40 - £100 depending on the amount of debt. In our experience, even mentioning that interest will be added if the payment is not received by a particular date is an incentive for a client to make an overdue payment.
- Stop work for the client and hold back any deliveries which are ready to go. If your chasing hasn't proved effective, don't work for them until they pay. Having said that, you should ensure this is in line with your T&Cs and any signed contracts.
- Take legal action. A County Court Judgement (CCJ) against a business can affect their credit rating and mere mention of a CCJ may be sufficient to settle the matter. It's expensive for you, but could be worth it if you win. Consider using Money Claim Online; it's a government service to facilitate collection for sums under £100k. There is also a new service for claims under £10k which intends to make the process for smaller claims more efficient and easy.
Good luck!
We hope this blog has been helpful and provided you with some useful tips to help chase your debts. The situation may seem bleak but there is plenty that can be done to fight back against this late payment crisis. We simply need to stand up and show that we won’t be dismissed. After all, we may be small businesses, but we have big voices.
To find out more about how rebuildingsociety.com supports small business, visit the Businesses section of our website.
