Can The UK Finally Stop Late Payers? And How Do SMEs Help Themselves?

Forbes

a day ago

They are the scourge of small businesses worldwide. Customers who pay their bills late cause entrepreneurs huge stress as cash flow issues mount up, opportunities to expand get missed and relationships sour. In the worst cases, late payment problems have led businesses to go under – and small businesses, often at the mercy of larger customers, are particularly vulnerable.
It's something of an international epidemic. In the US, recent research from Creditsafe found more than eight in 10 businesses were struggling with at least 30% of their monthly invoiced sales overdue. In the European Union, almost half of all small businesses suffer significant problems with late payments according to the EU Payment Observatory. Late payments cost the UK economy £11 billion a year ($14.9 billion), says London Economics.
The UK Government is so worried about this problem that its just announced a series of new measures aimed at helping small businesses to fight back. Ministers describe their proposals as 'the toughest laws on late payments in the G7'.
The idea is to give stronger powers to the UK's Small Business Commissioner, set up in 2017 to help small firms resolve disputes with large organisations, but often criticised as lacking teeth. Government reforms will see the Commissioner given new powers to issue fines, with ministers promising these could total millions of pounds for large businesses that persistently pay their suppliers late.
The Commissioner will also be asked to carry out spot checks on large businesses and to enforce a 30-day invoice verification period to speed up resolutions to disputes. Another key element of the reforms will see the UK's maximum payment terms – currently 60 days – reduced to 45 days.
Meanwhile, the audit committees of large listed companies in the UK will be handed a new legal duty to scrutinise the payment practices of their businesses, with the aim of ensuring fewer companies transgress in the first place.
'I want the UK to be the best place in the world to start a business, grow and succeed,' says small business minister Gareth Thomas. 'Too many small firms go under each year because they are not paid on time – that is completely unacceptable.'
Will the crackdown work? The proposals have had a positive reaction. Alan Vallance, chief executive of the ICAEW, the accounting trade body, thinks they could make a difference, particularly if more small businesses are prepared to actively engage with the Small Business Commissioners.
'Small businesses are the backbone of the UK economy, making up 99% of all businesses, employing two-fifths of the private sector workforce and generating more than half of the UK's business turnover,' says Vallance. 'It is vital they can operate in an environment that helps them grow and thrive.'
Tina McKenzie, policy chair of the Federation of Small Businesses, adds: 'This is bold and ambitious – it's an encouraging commitment from the government to take the side of small businesses.'
Others are more sceptical, however. Critics of the proposals point out that small businesses are often reluctant to make a fuss about late payments for fear of missing out on future business from key suppliers. Often, they feel they have no choice but to accept extended payment terms that hit them just as hard as customers on standard terms who pay late.
Previous efforts to hold large companies to account publicly have also come up short, with a new code of best practice introduced earlier this year to replace a previous standard that was widely seen as under-performing.
For this reason, accountants continue to encourage all small businesses to remain disciplined about they manage invoicing, payments and debt collection. Here are their 10 top tips for heading off a late payments crisis before it cause real damage to the business:
1. Get to know your customers
Running credit checks on new customers could help your business identify likely late- (or non-) payers. That will save valuable time and money in the future. It's now possible to run quick and inexpensive checks online.
2. Be crystal clear about payment terms
Make sure your payment terms are stated clearly on every invoice you send out and keep them consistent. It's also worth outlining the terms verbally to new customers.
3. Avoid old-fashioned forms of payment
Encourage customers to pay using cash, electronic transfer or direct debit.
4. Invest in credit control teams
If your business can afford to hire credit control staff, they may soon pay for themselves. But train staff in the right way; they need to be firm but polite.
5. Talk to customers
When your business sends out an unusually large invoice, it may be worthwhile calling the customer to make sure it has been received and there is no query.
6. Start chasing right away
Don't delay in chasing a late payment: get in touch as soon it falls due. The longer you waits to contacts the customer, the further down the queue your invoice is likely to drop.
7. Claim interest and compensation
In many countries, small businesses paid late have a statutory right to claim interest on late payments at set interest rates. They may also be able to claim compensation for debt recovery costs. Check your rights and warning customers about these costs, as this may encourage payment.
8. Be prepared to be flexible
On large outstanding amounts, you may be prepared to offer flexible payment terms. This might mean the customer pays in regular installments, say, or splits the bill into two manageable chunks. The key is to maximise your chances of payment.
9. Don't let the problem escalate
When a customer fails to pay for goods or services, stop supplying it immediately, rather than adding to its debt through further sales.
10. Use a debt management specialist
As a last resort, small businesses have the option of employing a debt recovery agency. Agencies will often work on a 'no recovery, no fee' basis, though this can prove expensive.