Small business: how to chase late-paying customers

Don’t put off chasing overdue invoices

(Image credit: Geber86)

published 23 January 2020

Small and medium-sized enterprises (SMEs) are chasing £50bn in late payments. Businesses typically waste 90 minutes every day trying to get overdue invoices paid. The average amount owed per invoice is £8,500.

Despite a series of government initiatives to tackle the problem, SMEs continue to complain that customers – particularly larger companies – do not pay their bills on time. More than 1,000 firms are going bust every year with cash-flow problems caused by bills not being settled on schedule.

Fight on two fronts

If your firm has a late payments problem, fight on two fronts: focus on persuading customers who are already late to pay up and avoid future problems.

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Don’t put off chasing late payments. Start doing so the day after a payment is due because the longer you leave it, the further down the queue your invoice may drop. And don’t let the problem escalate: refuse to continue supplying goods or services while payments are outstanding. In addition, make it clear that you will exercise your statutory right to claim interest on late payments at 8% over the Bank of England base rate as well as seek compensation for debt-recovery costs. Don’t be afraid to seek help. The Small Business Commissioner offers free support to businesses with fewer than 50 employees when they are chasing payments from larger organisations, which it defines as those with more than 50 employees. This can be a useful mediation service, particularly for businesses worried about upsetting clients. You can also appoint a debt-recovery agency to act for you. If you incur costs doing so, you’re entitled to pass these on to your debtor.

As for preventing customers’ accounts from reaching this point, there are several steps you can take. Get to know new customers before taking their business. Running credit checks online on new customers could save you time and money.

When you do start working for a new client, be clear about your payment terms. Are they on every invoice you send and are they consistent? Have you explained them to new customers? Give customers a choice of how to pay, but avoid cheques since these add delay to the payments process. You may also choose to be flexible in other ways, offering discounts for prompt payment, for example, or offering to split large payments into smaller instalments. But agree any such deals upfront.

Finally, if late payments are causing your business significant cash-flow problems, talk to your bank at an early stage about any help it can offer. Invoice finance can also be a useful way to unlock the value of unpaid invoices and improve your business’s cash flow.

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.