A report by campaigning organisation Good Business Pays has exposed the late payment culture at a number of failed businesses, including Credit Suisse, Arcadia Group companies, Flybe and Midas Construction. These businesses were found to have made particularly slow and late payments, over an extended period of time, and the report suggests that directors and shareholders of their creditors should have been made aware of these slow payments early.
Receiving late payments has a negative effect on your business’s cashflow and can also be an alarming indication of the financial health of your customers or debtors. It’s important to take steps to avoid late payments, as well as to act quickly when you notice that invoices are overdue or your creditors are taking a long time to pay. We’ve set out some relevant steps to reduce your risk below. If things do go wrong, you can also use our Debt collection toolkit for invoice templates, letters chasing overdue payments, and methods for escalating debt collection (eg by serving a statutory demand).
How can I ensure that my customers and clients pay me on time?
Before entering into an agreement with a client or customer and agreeing payment terms with them, there are various steps that you can take to minimise problems with non-payment later on. What is best for you will depend on the nature of the agreement and the relative importance of each customer or client to your business. The greater their importance to your business’s cash flow, the more vigilant you should be, but also remember that simply because your prospective client is able to pay you on time does not necessarily mean that they will in practice.
You should consider the following steps to reduce the risk of late payments and protect your business.
1. Establish systems and procedures for collecting payments
Good practice is essential to stop late payments before they become a problem and allow you to easily track how much you are owed.
When establishing or reviewing your payment practices and procedures, consider some or all of the following (not all of these will be suitable for all businesses):
- a cash management system to keep track of what you are owed and giving prompt and regular invoices to ensure that there is no delay or uncertainty about what is owed to you and when;
- state the payment due date clearly on your invoices, including any relevant credit period (see VAT invoicing for guidance on what other information should be included on your invoices and VAT invoice or Non-VAT invoice for templates);
- ask for a deposit or some other payment to be made up front to reduce the burden of late payment (particularly in respect of large or long-term contracts);
- offer rewards in your terms and conditions for early payment (eg discounts) or punish late payment (eg by charging interest – see our Q&A for more information about charging interest on late payments);
- request a guarantee from a more established parent company if you find that you are dealing with a company with limited assets;
- ensure that you know your bottom line and how flexible you are willing to be without endangering your business, and consider at what point it would be appropriate and proportionate for you to escalate your debt recovery action if payment is not made. You can use our Debt collection toolkit to find out about appropriate steps to take and create relevant documents;
- look out for warning signs and stay aware of changes in your client’s business which could affect its ability to pay you (eg they are beginning to pay later and later, or they are becoming more difficult to contact regarding payment); and/or
- consider entering into factoring or invoice discounting arrangements if you need to raise money against your invoices before they have been paid (see our Q&A for more information).
Remember that when you are storing your clients’ or customers’ financial information, you need to ensure that you comply with your data protection obligations. See The rules about storing data for how to comply with the law when storing customer data.
2. Check the financial health of new clients
If you do not do this already, you can build a few simple checks into your client due diligence to help you spot issues before they arise.
If a prospective client or customer is a company, you can check its Companies House register entry to get an idea of its financial well-being. At the very least, this will tell you when the company was incorporated, who is involved in it, and give you a history of the accounts that it has filed.
Be wary if you see that the company has few assets, was recently incorporated or has experienced insolvency issues in the past. If you are concerned, you can ask for a guarantee from a more established parent company if it has one, or even a personal guarantee from a director or other individual in the event that a new company fails to pay.
You could also:
- buy a credit report on a company from a credit reference agency, which will usually charge a small fee for a single credit report;
- search for your debtor’s name in the Gazette’s online search function to find if there are any insolvency notices about them eg if they have been made bankrupt, or, if a company, it’s the subject of any insolvency proceedings.
A client’s poor financial health does not necessarily mean you should avoid them, but it might prompt you to take more precautionary steps to protect your interests.
3. Check clients’ payment practices
Large businesses have an obligation to publish information about their payment practices, which includes information about the average time they take to pay their invoices. You can check for payment practices reports on the government’s payment practices website.
If your customers and clients are smaller businesses or individuals there is not much you can do to find out if they have a history of late payments. There are some voluntary codes of conduct; for example, you could check whether your customer or client has signed up to the Prompt Payment Code, which commits signatories to paying their suppliers on time, with a target of paying 95% of all invoices within 60 days and 95% of invoices to small suppliers (those with less than 50 employees) within 30 days. You can check the searchable list of businesses that have signed up on the Prompt Payment Code’s website.
You could also look for recommendations and reports by others who have dealt with your prospective client in the past, eg through a general search online, although be wary of references that the customer chooses to send you themselves.
The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.