How to avoid late payments

Late payments are the ‘biggest killer’ of small businesses – here’s how to avoid them

There are few things more threatening to small businesses than the danger inherent in late payments.

Don’t believe us? These government stats may well focus your mind:

• Late payments cost the UK economy almost £11bn every year
  
  
• Thirty-eight businesses close every day due to late payments
  
  
• More than 1.5 million businesses are affected by late payments
  
  

While this has a clear effect on the growth and productivity of the UK as a whole, it also has very real-life impacts on small business owners.

Whether a client has missed a payment or you are dealing with a repeat offender, late payments can seriously derail your business venture.

There are several reasons why someone might be paying you late, from economic challenges and poor management to disputes over the amount or the service provided.

The good news is that there are several ways small businesses can protect themselves against the risk of late payments – and the government looks set to bring in fresh legislation to tackle their impact.

The debilitating impact of late payments

Late payments are potentially deadly for small businesses, causing either temporary or permanent loss of cash.

This can have a wide range of impacts, including:

• You may have to delay paying invoices of your own
  
  
• You may need to borrow money to cover expenses
  
  
• It may be difficult to get credit in the future
  
  
• You may not be able to deliver products or services on time
  
  
• Growth plans may be impacted or delayed
  
  
• You may find it harder to attract new customers or business partners
  
  

There is also a time factor. Organising and sending out late payment letters takes time and effort that could otherwise go into developing your business or providing services.

How to avoid and collect late payments

One way to avoid late payments in the first place is to ensure you have a clear and well-run invoicing process. The last situation you want to be in is waiting for money because you haven’t sent an invoice out or have delayed doing so.

Furthermore, setting out clear terms and ensuring your clients have the correct bank details will also help grease the wheels of the payment process.

Sending reminders and offering payment plans are also useful tactics, while prompt payment can be incentivised by charging late fees or interest for any unpaid invoices.

Here are some steps that can help you avoid late payments:

• Assess your client’ ability to pay on time, their credit report, payment history, and reputation
  
  
• Negotiate appropriate payment terms, and consider implementing credit limits
  
  
• Ensure all your invoices are being sent out in a timely manner and contain all necessary payment details and terms
  
  
• Have any terms and conditions reviewed by a solicitor
  
  

What legal action can be taken to recover debt?

Chasing late payments can be a frustrating and time-consuming task. It also has the potential to put pressure on relationships with clients and customers which your business may rely on.

So, what can you do when all your polite reminder letters and phone calls have been ignored?

Sadly, sometimes there is no other option but to take legal action to recover debts. This, however, should not be a decision that is taken lightly or too quickly.

The first step in any process to recover a late payment should be to send a late payment letter, reminding your client that an invoice is overdue. This can be followed by a more forceful late payment demand letter, which may even raise the subject of interest if payment isn’t made within a set time frame.

In most cases these letters are likely to prompt payment, but should you still be struggling to get a response then you should send a formal letter before action.

This message would state your intention to issue court proceedings to recover the money you are owed. Following this procedure will increase your chances of recovering any legal costs down the line.

If the outstanding amount is still not settled, then a claim can be issued through the courts. Careful thought should be undertaken before doing so though, including a cost-benefit analysis and the impact on any ongoing relationship with the client.

Ultimately, taking legal action against a client who simply does have the money to pay you is a waste of your time and likely to cost you more in the long run.

If you do decide to take action, a claim form will need to be completed, including details of the debt, and an issue fee will be payable to the court.

The claim will then be served on your client, who will be required to acknowledge it within 14 days and to respond in full within 28. They may well file a defence or even a counterclaim. A final decision is then in the hands of the court.

It is important to note that this may not be a quick process, and you may not get all the money back that you are owed. Any payment owed under £10,000 will be allocated to the small claims court, where only court fees and limited fixed costs will be recoverable. It is also likely to take as long as six to 18 months before a final decision is made.

You may also want to consider taking out legal protection insurance, which will cover any legal costs arising from a claims process. Such insurance can also provide debt recovery, which will help you to chase outstanding debt, although it should be noted that it doesn’t allow you to claim directly for lost monies.

How the government is hoping to tackle poor payment practices

The government has pledged to tackle what it calls the scourge of late payments via its new Small Business Plan. It is planning to bring in legislation which will introduce maximum payment terms of 60 days, subsequently reduced to 45 days.

The proposals would also see new powers awarded to the Small Business Commissioner which would allow spot checks to be carried out and the enforcement of a 30-day invoice verification period to speed up disputes.

Audit committees will be legally required to scrutinise payment practices at board level with the aim of putting pressure on large companies to show they are treating suppliers fairly, while mandatory interest charges will be placed on clients who pay late