We’ve encountered many SMEs that have struggled with the impact that late payments from larger companies can have on their business . The consequences can have very serious effects on an SME's cashflow and long-term longevity. That’s why we’re glad to see that the government has published a new consultation that promises to get tough on large companies that habitually pay late.
Small business minister Kelly Tolhurst delivered a statement to The Commons announcing measures that will see large businesses fined for failing to pay small suppliers on time, as part of an initiative to increase transparency and accountability on late payments. The new initiative will see large businesses having to report on payment practices as as part of their annual company reports.
Read the new government initiative
The Small Business Commissioners office will also be given improved powers in order to hold larger businesses to account where they fail to make payments on time. The proposed powers include forcing disclosure of payment terms and practices, imposing financial penalties and binding payment plans on large businesses found to have unfair payment terms.
The Payment Practices Reporting Duty is already currently in place and means that companies can be fined for being in breach of these rules, however many small businesses choose not to pursue this course of action against larger firms for fear of losing future orders or work.
“Government has a number of measures in place to tackle late payment, from the Prompt Payment Code, the ability to charge interest on late payments, increased transparency through the Payment Practices Reporting Duty and the creation of the role and office of the Small Business Commissioner over a year ago,”
Kelly Tolhurst
In addition to this Tolhurts plans to launch a business basics fund competition, with funding of up to £1 million, in the hope that it will encourage small and medium-sized enterprises to utilise payment technology. The government has recognised that the adoption of payment technology solutions have a positive impact on the productivity of small businesses.
According to research conducted by Duff & Phelps, the average value of each late payment faced by businesses is £6,142. This is a significant sum for many small businesses and the knock-on effect is that the business is then unable to make payments to their own creditors on time, putting their own business at risk and seriously affecting the firm’s ability to invest in growth.
What to do if your clients pay late.
If you’re one of the many small businesses that regularly experience late repayments from your clients here’s some of the steps you can take to help mitigate the consequences.
- Use the tools available
Technology can be a very powerful tool in helping you get paid on time. From automated e-invoicing and automated payment reminders to online credit checking facilities, there are many options to help you reduce the effect of late paying clients.
Many cloud-based accounting packages offer standard e-invoicing options, which will ensure that invoices are automatically sent out to clients, followed by automated payment reminders. Meaning that you can carry on doing what you do best with the assurance that clients will be followed up.
Credit checking tools are a useful way to make sure you ‘know your client’ before engaging in bigger projects. This will help you make more informed decisions on the level of credit you might wish to extend and the payment terms you set.
- Be proactive
Prevention is always better than a cure. Always ensure that you clearly agree and set out your payment terms before delivering a project or goods. Make sure that you have Terms and Conditions that set out the procedures in case of late payments.
Proactivity and communication (see below) applies not only to your client-side relations but also, and some times more importantly, to your creditor relations. If you know that you’re going to be paid late and that this might prevent you from making payments to creditors on time, make sure that you act on this as quickly as possible by letting your creditors know. If you’re open transparent and proactive, you might be able to negotiate an extension on your own payments.
- Communicate and be persistent
Whether you have automated payment reminders or not, communication is key to making sure you get paid. ‘He who shouts the loudest’ usually gets paid first. Ideally, try not to shout (however tempting it may be!), and rather communicate via phone (followed by email) so as to keep the conversation friendly and to avoid any misinterpretation of tone. Try to remain professional and friendly and if you’re not given a date for payment, let them know you’ll follow up the next day. Make sure you follow up.
- Legal Action
If the worse comes to the worst,you may need to initiate legal action against your client to get payment. Depending on the amount outstanding there are a number of avenues by which you can go about it. You may want to speak to your solicitor about how best to proceed or you can explore the advice of services like the FSB and Small Business Commissioner.
Read more tips on managing your small business cash flow.
