Late payment: how to limit the chances it will affect your small business

Late payment can place an enormous strain on cash flow, which can stunt a small business’s growth, impact its own ability to operate and pay its suppliers. Ultimately, late payment can kill small businesses, of course. Read on below.

Counting the cost of late payment

Late payment can place an enormous strain on cash flow, which can stunt a small business’s growth, impact its own ability to operate and pay its suppliers. Ultimately, late payment can kill small businesses, of course.

With budgets stretched thanks to rising costs and rampant inflation, late payment could become an even bigger problem for small businesses in 2022 and beyond. The Federation of Small Businesses is warning of a worsening of the UK’s late payment crisis, predicting that 440,000 UK SMEs could be forced to close in 2022 solely because of late payment. So, what can you do to better protect your small business from late payment?

Protect your business from late payment

Firstly, don’t be too generous with the credit that you grant to your customers. If possible, insist on immediate payment from new customers, with credit only granted when it’s been earned over time.

If you have to grant credit, credit check all new customers and ask for credit references. Get them to complete and sign credit applications, showing that they acknowledge and approve your credit terms. Legally, you can apply interest charges to overdue invoices of 8% plus the Bank of England base rate per day for sales to other businesses, but you need to send a new invoice (or invoices) detailing the interest charged. 

In many sectors, 30 days’ credit is common, but you may be able to grant only 20 days, for example, which would be better for your cash flow. Also set credit limits, so that customers cannot build up debts that could kill your business. For high-value sales, agree staged payments or part payment upfront, and the balance on supply.

Late payment, invoicing and credit control

You need to send your invoices as soon as possible. First make sure that the customer has no issues with your products or services, because that could later delay payment. The longer you take to send your invoices, the later you’ll  get paid, which creates unnecessary additional cash flow pressure.

Include all of the necessary details in your invoice and make sure the price and other information is correct (mistakes can lead to late payment). Bank details and the payment due date should be stated clearly. Send your invoices by email, in readable format, because hard copies can easily get lost, which can also result in late payment.

Your small business needs a reliable credit-control system in place. Many businesses use invoicing/credit control software that sends automatic notifications shortly before or on the day an invoice is due for payment. Then you can send a polite but clear and firm email to the customer, reminding them that payment is due. Phoning them is another option, of course, which can prove more successful (emails can be easier to ignore).

More ways to prevent late payment

Many businesses provide cost-effective incentives for early payment (eg “Pay quickly and get 5% off your next order”). Although they can work well, carefully work out the implications before making such offers. Always thank customers for prompt payment, because it can help to ensure that their good payment habits remain.

The closer and stronger your relationship with your clients, the less likely late payment will happen, although even good customers can pay late if they’re experiencing cash flow issues, which is something to remember when chasing unpaid invoices. Sometimes you have to show some flexibility and understanding, but no customer should be allowed to simply ignore your payment terms. It’s your money that the customer owes you, for products or services you’ve supplied in good faith. 

Although you’ll pay for it, invoice finance can provide a good cash flow solution if late payment is a problem for your business. Invoice finance can enable you to quickly raise cash against the value of your unpaid invoices. Typically, you receive up to 90% of your unpaid invoice straight away from a lender, then get the balance, minus the lender’s fee, when your customer pays the invoice. If you use invoice discounting, you remain in control of collecting payment from the customer, so they’ll never know that you’re using invoice finance. With invoice factoring, the lender collects payment from your customer. 

Claiming debt recovery costs on late payments

You can also charge a business one fixed sum to cover the cost of recovering a late payment, in addition to any interest you add on.

• If the value of debt is up to £999.99, you can charge £40.
• If it’s between £1,000 and £9,999.99, you can charge £70.
• If it’s £10,000 or more, you can charge £100.
• You can also claim for reasonable costs each time you try to recover the debt.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.