Research by both the Government, the FSB (Federation of Small Businesses) and payment company Bacs clearly indicates that late payment is a major concern for small businesses.
Despite 2013 legislation stating that debtors not paying within 60 days (for businesses) or 30 days (for public authorities) will be forced to pay interest and reimburse reasonable recovery costs, around 85% of SMEs are affected by late payments or non-payment, damaging their cashflow and often forcing them to use expensive overdrafts or become late payers themselves. Is your business in that 85%? Then here are our top tips for tackling those late payments.
Check Out Potential Clients/Customers Before you take on new clients, customers or contracts, do your research. Credit reference agencies like Experian can give you a company’s credit rating information, and independent bodies such as Companies House can give you a status report on the company too. This ensures you’re pre-warned about customers who have failed to make payments in the past.Don’t be afraid to turn companies or contracts down. It’s better to do this than risk investing a great deal of time and effort into unpaid work that you can ill-afford.
Establish Your Terms at the Start Make sure both you and the client have clearly set and agreed expectations as to delivery times, deadlines and payment points. If your terms are that you’re invoices are paid directly into your bank, make this clear. The FSB recommends always having a written contract.
Try To Make Electronic Payment Your Standard Electronic payments straight into your bank account, whether made as a bank to bank transfer, standing order or direct debit, are easy and swift for both parties. Usually it is cheaper to process electronic payments than cheques or cash, and the funds are immediately in your bank ready for use. It also eliminates the possibility of the ‘cheque lost in the post’ scenario. You could also take card payments.It may seem overly cautious, but it’s worth asking for an official letter or payment slip from companies you deal with, which should include their sort code and account number – just to ensure all details are correct and avoid fraud. Always ensure you put your correct sort code and account number on all invoices and payment letters too.
Invoice Regularly And Chase Early Use automated software, an app, a note in your diary – whatever works for you – to ensure you invoice as soon as an agreed payment point is reached, be that an elapsed time period or a pre-agreed stage of progress. Monitor and record payments as you receive them; the last thing you want to do is aggravate clients who have paid up on time by chasing them up, especially when you should be using that time to swiftly chase up clients who haven’t paid. Don’t be tempted to leave it and make up your own excuses for them; as soon as the payment is overdue, chase it politely but firmly with an email or phone call.If this gets no response, resend the invoice, clearly marking it as a second bill, by email and post too if possible. Ensure you’ve made it crystal clear how to pay. Any reminder you send out after this stage should contain a note to the effect that late payments automatically prompt a reconsideration of your client’s future credit status with you. If these measures don’t elicit a response and/or payment, see tips 5 and 6.
Apply Interest to Late Payments Some small businesses are reluctant to do this, scared of losing clients. But all companies in the UK have a statutory right to charge interest on late payments; currently the rate is the Bank of England base rate plus 8%. And again, if in your terms you shared with your client at the beginning, you have made it clear that this is a step you would take with late payments – and at what stage you would do so – then they have been pre-warned. Add a reminder about this condition to any repeat invoices you send, and before you apply interest, send a late payment letter stating your intention to do so. Have a rule about when and how you apply interest and stick to it. The Bacs website includes useful templates for payment request letters.
Don’t Just Let It Go So you’ve sent invoices and a late payment letter. You’ve informed them that their debt is now accruing interest. But you’ve still not received payment. What are your options?If the debt is below £100,000, you can go to the Government’s Moneyclaim Online site, the HM Courts & Tribunals Service Internet based service for claimants and defendants. The site allows you to make or respond to a money claim via the internet. The claim will be issued within 2 working days from the date you submit the claim online, and if the situation remains unresolved, the local county court can become involved and may possibly issue a CCJ (County Court Judgement). Alternatively you could issue a ‘winding up petition’, a more serious measure which seeks to prove to the court that the debtor’s company can’t pay its debt of £750 or more and should therefore go into liquidation.
Before you go ahead with either of these options, make sure you follow the links and read the information the Government provides carefully. Claims must be filed correctly, as errors may end up costing you money instead.
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