Small businesses: The scourge of late payments

The hunt is on for the person who can solve the late-payments crisis threatening Britain’s small and medium-sized enterprise.

The hunt is on for the person who can solve the late-payments crisis threatening Britain's small and medium-sized enterprise (SMEs). Applications for the post of small business commissioner close next week, with a £130,000 salary on offer for the right candidate. The appointee is scheduled to be announced in late June, two years after plans for the role were first unveiled by ministers, meaning that nobody can accuse the government of rushing the process. Yet the need for a new approach to what the Department for Business's advertisement for the job describes as "the scourge of late payment" is as great as ever.

Data from Bacs, the organisation that runs the banking payments system, suggests 47% of SMEs are routinely paid late by their customers. The average small business is owed £32,185 in late payments according to the research the equivalent of £26.3bn across the UK as a whole. The effects can be devastating. A third of SMEs say they have no choice but to settle their own bills late because customers aren't paying on time. A fifth warn their future is threatened, with late payments causing severe cash-flow problems. Many more are prevented from investing for future growth.

However, while this has been a long-standing issue for SMEs, successive governments have found it difficult to make much impact on the problem. Legislation brought in four years ago under the European Union's late-payment directive gives SMEs the right to compensation when bills are paid late, but many smaller businesses have not wanted to confront larger suppliers, on which they may be disproportionately dependent, with legal action. Nor has the prompt payment code a voluntary scheme introduced by the government in 2015 under which larger firms commit to paying suppliers on time made much difference, despite almost 2,000 businesses signing up to it.

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Small businesses themselves are sceptical about the latest attempt to tackle late payments: 38% say government interventions will not improve the situation, according to Bacs. That may reflect the very limited powers to be granted to the small business commissioner. Ministers emphasise that the role of the person appointed will be to support, advise and encourage cultural change, rather than to bang heads together. Nevertheless, the need for a new impetus in tackling late payments is pressing. Research published by Zurich Insurance suggests the UK stands alone in failing to get on top of this problem. The insurer looked at the value of invoices paid late across Europe, recording sharp falls in recent years in countries including Belgium, the Netherlands, Switzerland, Germany and Ireland. Only the UK has seen no such improvements.

How to make sure customers pay up

All businesses that face the problem of late payments need to get on top of the issue before it's too late, or they risk running up a large number of bad debts that may prove impossible to collect. Here are some key points to consider and actions to take if your firm is having problems getting customers to pay up.

Know your customers. Run credit checks on any new ones before extending them credit.

Be clear about your payment terms. Include details on every invoice you send, and always talk terms through with new customers to avoid misunderstandings.

Avoid cheques. Encourage customers to pay using cash, electronic transfer or direct debit.

Keep talking. Speak to customers regularly, and let them know when you're issuing invoices, particularly for larger sums.

Start chasing right away. Follow up on a late payment from the day after it was due, rather than waiting to see if it will turn up.

Claim interest and expenses. You have a statutory right to claim interest on late payments, at 8% over the Bank of England base rate, as well as compensation for debt recovery costs.

Be flexible. Consider allowing customers to pay off their outstanding bills by regular instalments, or in another way that suits them but be wary of letting them run up further liabilities in future.

Don't let the problem escalate. If your efforts to secure payments for goods or services supplied are frustrated, do not offer any further credit to the customer.

Don't be afraid to involve the professionals. Debt recovery agencies and similar organisations will act on your behalf.

Prioritise credit control. If your business is large enough, make sure you have appropriately trained and experienced staff dedicated to tackling late payments.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.