Late payments can be a nagging issue for any business, but they can be especially detrimental to small and medium-sized businesses.
Research has estimated various levels of late payments owed to SMEs. For instance in 2017, Bacs Payment Schemes Limited put the total figure owed to SMEs at £14 billion, while the Zurich Risk Index estimated that SMEs were owed £45 billion by larger companies alone, having previously reported that SMEs were owed a total of £225 billion in late payments.
These late payments not only disrupt cash flow but also strain customer relations. However, there are effective ways to mitigate this risk and ensure smoother operations.
Proactive Measures to Minimize Late Payments
- Set Clear Payment Terms from the Start
Make sure you and your customer are on the same page regarding payment terms. These should be agreed upon before entering into any business relationship and should preferably be documented in writing.
- Financial Health Check of the Customer
Before entering into a business relationship, evaluate your customer's financial standing. You can either set an internal benchmark or take advantage of credit checking facilities to determine the risk level.
- Explicitly Mention Interest on Overdue Payments
From the get-go, let your customers know that late payments will incur interest as per the Late Payment of Commercial Debts (Interest) Act 1998. This should be stated on all written communications, credit application forms, and invoices. Specifically, you can include the phrase, "We will exercise our right to claim interest under the Late Payment of Commercial Debts (Interest) Act 1998 if we are not paid on time in accordance with our agreed terms of business."
- Swift Invoicing
Speed is key. The sooner you send out an invoice, the sooner you are likely to get paid. Don't give the impression that you can afford to wait.
- Quick Resolution of Customer Complaints
Deal with any legitimate customer complaints promptly. The faster issues are resolved, the quicker you can expect payments.
- Regular Credit Control Reviews
Regularly review your credit control and debt management strategies to ensure they are effective. Make sure you are keeping tabs on customer payment schedules.
- When Things Go South: Legal Recourse
Who can claim under the Act:
The Late Payment of Commercial Debts (Interest) Act 1998 allows all businesses, regardless of their size, and public sector bodies to claim interest on commercial debts.
When to Claim:
You can claim interest as soon as a payment becomes late. The Act sets a default period of 30 days after which interest begins to accumulate.
Rate of Interest:
The rate of interest is determined as the base rate of the Bank of England plus 8%, according to the terms set in the contract or at the end of the default period.
Remember, the longer a debt is left unpaid, the less likely it is to ever be paid. Be prompt in claiming interest under the Act. You have up to six years in England, Wales, and Northern Ireland, and up to five years in Scotland to make your claim, even if you've ceased doing business with the customer.
Late payments can be a significant hurdle, but with the right strategies, you can safeguard your cash flow and maintain strong customer relationships.