According to a new study from The Federation of Small Businesses, half of the invoices issued by UK small or medium-sized enterprises (SMEs) are paid late. January saw a sharp spike in the time clients waited to settle overdue invoices to small businesses.
Findings highlighted the following for business owners:
Education, construction, administration, professional, scientific, transportation, information technology, and arts are the most affected industries. Late payments were more common among small enterprises in the southeast and east of England and Northern Ireland.
In addition, we also found some recent statistics from Xero, the worldwide small company platform, that payments to small businesses were made on average 8.2 days late in September 2022, the most remarkable late payment period since August 2020.
According to Xero's Small Business Index, based on data from hundreds of thousands of small businesses, invoices in the UK are paid substantially later than in Australia (6.5 days) and New Zealand. (6.2 days).
The government announced an overhaul of the Prompt Payment Code (PPC) to crack down on delayed invoices owed to small businesses in January 2021.
Under these new reforms, companies that have signed up for the Prompt Payment Code will be obliged to pay small businesses within 30 days - half the time outlined in the current Code.
Despite over 3,000 organisations joining the Code, poor payment practices continue to exist, with many invoice payments taking far longer than the current 60-day objective for 95% of bills. Corporations in the United Kingdom owe £23.4 billion in late payments, affecting their cash flows and, ultimately, the survival of their business.
To address this, business owners, Finance Directors, or CEOs will be asked to sign the Code, accepting that suppliers may charge interest on late bills under the Code and that infringements will be investigated. Those who have signed up for the Code will redouble their efforts to ensure payments are paid on time, and the government will continue to publicise violations to promote compliance.
Small business enterprises employ two-thirds of the UK private sector and generate more than half of all company revenue. Late payments impact their bottom line, which can stifle investment or job growth and, in the worst-case scenario, result in job losses and firm closures.
The UK Government must prioritise late payment, as measures, such as the abovementioned PPC, are vital but insufficient in tackling larger businesses that do not pay on time.
Debt collection may appear complicated, but you should have a procedure to deal with late payments as swiftly and efficiently as possible. Non-payment should be followed up quickly by email, phone call, or letter. Making contact can assist in reminding clients to pay, maintaining a positive working relationship, and avoiding debt collection. However, if you are due a substantial sum or are concerned about the consumer's ability to pay, you should be ready to act sooner.
1. Set out your payment terms and expectations at the beginning
Make sure your customer is clear on your payment terms right from the start – highlight what they need to pay, when they need to pay it, and whether there are any penalties for late payments, and then display it obviously on each invoice. This will help customers avoid paying late simply because they weren’t sure when to pay. It will also help make conversations tackling late payments a little less awkward, as you’ll simply be reminding them of the terms rather than surprising them with penalties or deadlines.
Some businesses can compensate for late payments by providing a minor discount to customers who pay on time. If you can afford it, consider taking a percentage off the amount.
2. Run a credit report on your customers
Before starting a working relationship with new customers, could you learn more about them? Before giving a business credit check on new consumers, you should consider running a company credit check or signing up for UK or International monitoring notifications so you can track any changes in the companies you do business with to keep one step ahead.
It is critical to continuously monitor any changes since they give important insights into a company's financial health, allowing you to respond promptly to safeguard your small business from bad debt.
3. Don’t wait to chase
If you wait too long to pursue outstanding accounts, your clients will only continue to ignore your invoice. Be polite but firm and be timely in your follow-up emails and phone calls, urging early payment from when the credit term expires.
4. Streamline invoicing and payments processes
Creating terms and conditions for credit is one thing; getting paid is quite another. So, everything you can do to improve the procedure's efficiency will help lessen this process. Invoicing and, of course, payment are critical components of this. However, rather than relying on manual, paper-based processes, automate your invoicing and transaction process. From generating an invoice and sending it to the customer so they can pay via an online portal - creating a single streamlined process for all documents and communications, reducing debtor days and payments to chase, and improving customer experiences.
5. Discuss with your consumer why they aren't paying on time.
Avoiding late payments requires effective communication with your consumer. Your customer may have a legitimate cause for failing to pay you on time. By engaging them early on, you can work with them to fix the situation, possibly by adjusting the payment date or offering to make payments in instalments.
A payment is technically late once it is past the due date, even if it’s received one minute past the deadline! However, once the deadline has passed, many creditors will provide a grace period for you to pay before imposing a late charge. When your contract expires or no grace period is specified, your provider will typically set a late fee.
When you pay late or miss a payment completely, your lender will usually contact credit report agencies who will add this information to your credit report, which other lenders can see when you apply for a line of credit. Your company credit score reflects how reliable you are with credit. It affects your ability to borrow money using your credit history, details on your application form, and any other information they hold on you.
Some companies take late payments into account when calculating your score, and this is because overdue payments can suggest you need help managing your finances. As a result, you might not meet some companies' lending criteria.
Dan Hancocks, CoCredo’s MD, says: “I regularly speak to customers who are seeing an alarming number of companies they do business with go under, and are finding that getting customers to pay was becoming a real struggle, even more so since the pandemic.”
“Organisations of all sizes have been confronted with supply chain difficulties, prompting many to assess the security and resilience of their existing supply networks.
Smaller enterprises that can adapt swiftly to the requirements of larger organisations are more vital than ever, but it certainly will take time. However, more accountability is required for governments and large enterprises to adhere to the Prompt Payment Code.”
A CoCredo company credit check gives the inside information required to evaluate the financial situation of your customers, suppliers, and competitors to safeguard your company from bad debt.
Keep track of your credit score with a CoCredo FREE Trial of a business credit report by calling us at 01494 790 600 or via email.