Smaller businesses face cash squeeze

For many smaller companies, getting paid on time is a matter of life and death. David Prosser explains what can be done to keep the money coming in.


Pulling it in can be harder than it should be
(Image credit: Gearstd)

For too many small- and medium-sized enterprises (SMEs), getting paid on time is starting to become a matter of life or death. The level of debt written off as unrecoverable by the typical SME now stands at £20,403 a year, according to lender Bibby Financial Services. That's an increase of 70% on last year, when Bibby last conducted the research.

Another funding provider, Siemens Financial Services, says its research suggests that, while large businesses in the UK wait for an average of just 48 days to see their invoices settled, smaller firms those with a turnover of less than £1m a year must wait 72 days, or 50% longer. The delay translates into SMEs missing out on more than £250bn of liquid cash flow each year, Siemens reckons, hampering smaller firms' ability to invest and recruit. In the worst cases, the time lost threatens solvency.

No wonder the Federation of Small Business (FSB) is growing frustrated with the worsening late payments and bad debt problem. Its own research suggests that as many as 50,000 SMEs go under each year owing to problems related to late payments. Some 37% of smaller firms have run into cash-flow difficulties because of late payments, the FSB warns; 30% have had to use an overdraft; and 20% complain that the issue has adversely affected their profitability. The FSB is so concerned that it has now launched its own service for SMEs struggling to get customers to pay up. The online service enables small businesses to generate a solicitor's letter that can be sent to the late payer with a demand that the invoice is settled within seven days.

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In most cases, the FSB says, such a letter is all that is required to pressure late payers into settling their bills. Nonetheless, while this suggests the service could be a useful one for many firms, it also implies customers are paying late because they think they can get away with it, not because they're struggling financially.

Such customers will be in the sights of the small business commissioner, a government-backed ombudsman whom ministers have promised to empower to intervene in disputes affecting SMEs. That's if he or she ever turns up. Many SME owners are becoming frustrated with the lack of news on when the commissioner will be up and running. The role was first announced more than two years ago, and advertised publicly earlier this year yet no appointment has yet been unveiled.

How to deal with late payers

Knowing your customers better is a good start: even a simple credit check of new customers conducted online in a few minutes could save you time and money in future if it identifies a problem. Be clear up-front about your payment terms, spelling them out in schedules of work, terms and conditions, and invoices. Ensure they're simple to understand.

Issue invoices as soon as you can when work is completed checking carefully for accuracy and give customers several payment options, including online transfers and direct debits. Avoid cheques.

When invoices aren't settled on time, start chasing immediately. You may be prepared to consider flexible payment terms for larger sums agreeing an instalment schedule, for example but don't let the problem escalate. If you're making no progress with the invoice, don't offer further services to the customer.

Consider professional help. Automation software can help you speed up and manage the invoicing processing, or you could outsource credit control. You may also need to consider legal services or debt-collection agencies to chase down bad debts.

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.