Has your business been impacted by late payments? According to the Federation of Small Businesses (FSB), a recent study of 1,200 businesses found that 30% had experienced an increase in late payments over the past three months, with an additional 8% experiencing other types of poor payment practices.
The consequences of late payments can be serious for small businesses, not only because of the resources required to chase unpaid invoices, but also as a result of the cash flow bottleneck that might result. With 8% of businesses surveyed warning that the viability of their business was now being threatened by late payments, the FSB’s study suggests that 440,000 small businesses could be forced out of business this year alone as a consequence.
As we enter a new year, you might be wondering what steps you can take to proactively crack down on late payers and to prevent any problems before they occur. We’ve set out some pointers to get you started:
1. Put in place robust systems and procedures
Start as you mean to go on by putting in place robust systems and procedures for managing payments. This will help you to track what you’re owed and will remind you to send prompt and regular invoices.
2. Know who you’re getting into business with
Do some background research into prospective clients before going into business with them; this will help you to tailor your processes to the specific risk of non-payment in each case. For example, if your client is a company, consider checking its Companies House register entry to get an idea about its financial well-being. If they’re an individual, consider buying a credit report and/or searching for their name in the Gazette online to see if there are any insolvency notices about them.
If a client appears to have poor financial health, it doesn’t necessarily mean you should avoid going into business with them, but it might prompt you to take more precautionary steps. For example, you might ask for a deposit or other up-front payment, or consider pricing on a retainer basis.
3. Look out for red flags
Make sure you look out for any warning signs, including changes to your client’s business which could affect its ability to pay you. Red flags might include your client beginning to pay you later and later, or becoming more difficult for you to contact regarding payment.
4. Consider charging interest
Make sure you know when you’re entitled to charge interest on late payments. This will be the case if:
- You contract or agreement says that you can; or
- Your contract doesn’t mention interest, but you’re owed money by another business.
It’s a good idea to let your client know you’re going to start charging interest on their late payment first, as this may prompt them to pay up sooner.
5. Know when and how to escalate
When a payment becomes late, if you’re going to take action to chase it, you should be ready to do so immediately, so make sure you know what action to take and when. The steps you take will ultimately be a commercial decision for your business, but our debt collection timeline provides a suggested timeline for chasing payment of your unpaid invoices, including template letters you can use.
Remember that chasing debts can cost your business time and money and aggressive debt recovery can damage your client relationships. Sometimes it might be more prudent for your business to cut its losses and write off a debt, so ensure you know your bottom line.
For detailed guidance about chasing payment of debts, including an overview of different actions you can take to escalate your debt recovery, see our Q&A on Chasing payments and enforcement.
Before joining Sparqa Legal as a Senior Legal Editor in 2017, Frankie spent five years training and practising as a corporate disputes and investigations lawyer at leading international law firm Hogan Lovells. As legal insights lead, Frankie regularly contributes to Sparqa Legal’s blog, writing content across employment law, data protection, disputes and more.