According to the Small Business Commissioner, a third of all payments to small businesses are late, and 20% of those businesses face cash flow problems as a consequence. Taking unexpected loans to keep the cash flowing may adversely affect your credit rating, as well as cause cash flow bottlenecks in your business. The worst-case scenario is that you are left insolvent and forced to fold your business because of unpaid invoices.
Considering the risks posed by late payments, it’s wise that all small businesses take steps to avoid the issue arising in the first place, and to address the impact if it does.
By the way, to help you keep track of your cash flow, we can help you focus more on growing your business while you leave bookkeeping and accounting tasks to us.
How Can I Avoid the Cash Flow Bottleneck?
Plan ahead. Putting in place robust processes and doing your homework will help you to avoid issues of non-payment arising later down the line.
Establish payments systems and processes
Put prompt payment at the forefront of the agenda by taking the following steps:
- Make sure your payment terms are clear
Putting in place written terms and conditions which set out the price and payment terms for your goods and/or services will help to make sure both you and your client are on the same page ab
- Set up a system to record what you’re owed
Putting in place a cash management system will help you to keep track of what you’re owed, prompt you to send invoices and remind you when payment is due. There are different software solutions that can help.
- Send invoices on time and regularly
Make sure your invoices are easy to understand, clearly state the payment due date and include your bank details and any other acceptable methods of payment. These VAT and non-VAT invoice templates will help you to set out all of the required information.
- Consider when you should change your pricing terms
There may be circumstances where you should consider changing your pricing terms. For instance, if a customer or job is at higher risk for your business, it might be appropriate for you to ask for an upfront payment or to price on a retainer basis.
- Consider offering incentives in your T&Cs
Consider whether it would be appropriate to include incentives in your T&Cs (e.g. discounts for early payment) and/or to include a clause charging interest on late payments.
Do your homework before taking on new clients
You’ve won a new client? Congratulations! But before you jump straight into a new commercial relationship, it’s a good idea to do some due diligence to check your new client’s financial health and to get an idea about their typical payment practices. This will not only allow you to tailor your processes to your client’s specific risk of non-payment, but if you know where you stand then you’ll also be better placed to look out for warning signs (e.g. if their payment practices start to change).
The following steps could help:
- If your prospective client is a company, check its Companies House register to get an idea of its financial well-being (e.g. when it was incorporated, who’s involved and what its annual accounts look like). If it’s got few (or no!) assets, you could take extra precautions, like asking for guarantees or buying a credit report.
- If your prospective client is an individual, consider buying a credit report or searching their name in the Gazette to see if they’ve had insolvency issues before.
- If your client is a large business, check its payment practices on the Government’s payment practices website. If it’s a small business, see if it’s signed up to the Prompt Payment Code (a voluntary code committing it to pay within 60 days).
How Should I Chase Payment When Invoices Fall Due?
If despite your best efforts, an invoice goes unpaid there are several possible next steps that your business can consider, including any (or all) of the following:
Immediately contact your client
Always get in touch with your client or customer straight away to find out why there has been a delay. Wherever you can, follow up any conversations in writing (e.g. by email) so that you’ve got a written record.
If this initial conversation doesn’t bear any fruit, send chasing letters on an escalating scale e.g. by following this suggested debt collection timeline.
Find out whether you can charge interest
You can charge interest on late payments if it’s written into your contract or if your client is another business (in which case you can charge statutory interest). Make it clear to your client in advance that you’ll be charging interest if they don’t pay up (e.g. in your chasing letters).
Consider escalating your debt recovery action
There are various debt recovery actions available to you, from instructing a debt collector or serving a statutory demand (a formal, written demand for payment), to selling the debt or even going to court to get paid.
What is most appropriate for your business will depend on many factors, including the value of the debt, the impact that taking formal action might have on your client relationship, and the resources available to you.
In the context of the coronavirus pandemic, it is also important for you to bear in mind that the Government has recommended that businesses adopt a fair and reasonable approach to chasing payments, avoiding disputes where possible. They have also currently voided statutory demands sent to businesses until 30 June 2021.
Know your bottom line
Ensure that you know your bottom line; how flexible are you willing to be with late payments without endangering your business, and when should you write off debt rather than spending precious time and resources chasing it?
The payment processes you put in place and how you choose to chase up late payments are both commercial decisions for your business. Whatever route you choose, our partner Sparqa Legal has extensive guidance and template documents covering payment systems and procedures, charging interest on late payments, debt recovery and court proceedings.
A note from Sparqa Legal:
The content in this article is up-to-date at the date of publishing. The information provided is for information purposes only, and is not for the purpose of providing legal advice. ©Sparqa Limited 2021. All rights reserved.