Nearly a quarter of Britain’s SMEs have been forced into a financial crisis by the scourge of late payments. So how can you make sure that ‘PAID’ stamp stays busy?
Having customers for whom the phrase “blood out of a stone” was coined is a nuisance, but also an inevitable part of being a start-up or growing small firm, as survey data published recently by Lloyds Bank confirms.
Of all the small enterprises facing cashflow problems, 59 per cent blamed late payments for their predicament. “Cashflow is the lifeblood of any business but for too many businesses, late payments continue to be a significant problem,” said Donald Kerr, a director at Lloyds.
Meanwhile, a report from invoice finance specialist Bibby Financial Services has revealed that Britain’s five million smaller companies are owed a staggering estimated £26.8bn in overdue payments, with 55 per cent waiting more than 30 days to be paid.
So what can you do to ensure your debtors pay on time? Here’s Director’s quick guide to your options and your statutory rights…
1. Take pre-emptive steps
You can assess a customer’s creditworthiness by obtaining trade references (select the referees yourself, rather than allowing your customer to do so) or via online credit checks – and set their credit limit accordingly. It’s also worth setting a lower limit for new customers.
To ensure you’re prepared for any legal wrangling, it’s important to provide clear terms and conditions in contracts – include a clause emphasising that all goods remain in your ownership until they are paid for. All your financial policies – your statutory right to charge interest (eight per cent plus the Bank of England base rate) on late payments, for example, or your intention to use an external company for overdue payment collection – should be published on your website.
2. Invoice promptly and smartly
An efficient invoicing and tracking system is imperative. Invoices should be thorough, with every cost, date and detail itemised clearly. Mistakes at this stage are reasonable grounds for customers to delay payment and the unscrupulous may seek out and cite such oversights, making a reissued invoice a time-consuming inevitability.
3. Make payment easy
Encouraging your clients to set up a direct debit saves effort at your end, improves cashflow and facilitates accurate financial forecasting. Alternatively, allowing as many different payment methods as possible – credit cards, bank transfer, debit card, cash – will improve your chances of recouping debts in a timely and hassle-free fashion. If you’re a small enterprise, PayPal is another convenient option.
4. Chase in a polite and timely fashion
A statement, detailing the amount outstanding and due date, sent immediately the payment becomes overdue, should nudge your debtor into action. If not, a gentle reminder, for example a week later, will show you’ve got your eye on the ball. Should that fail, a phone call should be made to the client’s accounts department to ascertain whether they have any queries. Don’t consider a verbal agreement mission accomplished, though, until a plan of action with regard to payment has been agreed.
5. Seek outside help
If your cashflow is getting out of hand, Positive Collections (positivecollections.co.uk) is an example of a free credit control system which helps organisations of all sizes. Licensed by the OFT, it also has a system for ethical and inexpensive debt recovery.
For more advice on tackling late payments