Business survival is all about cash flow. Businesses can keep going as long as they can pay their bills. It has been some time since the Prompt Payment Code came into force and we take a look at what this means for SMBs. Here, Accelerated Payments share our insights into the issues around late payment and what small businesses can do today to safeguard their cash flow.
The issue of late payment
Britain’s small-and-medium sized enterprises (SMBs) are owed in total an estimated £44.6 billion in late payments, with one in five business owners owed over £25,000. That’s around 1.6% of UK GDP.
With only one-third of PLC’s paying invoices within 30 days, and conditions showing no signs of improving, cash flow is becoming a real problem for UK SMBs.
The average business is owed £38k; at £50k one in four businesses fail. Around one-third of UK businesses have experienced late payment of 90 days or more. Added to this, valuable time that could be spent planning strategy, is spent chasing receivables.
The buying power of large companies
This isn’t to direct all the blame at the larger companies: they’re often under pressure to define and control their credit terms in line with their business objectives, which leads to the need for extended credit terms
But they have a lot of buying power and they use it. Therefore, the finance industry must be creative in finding solutions and leveraging technology for smaller businesses to alleviate cash-flow issues. It must then get the big companies on board with these solutions.
What can SMBs do today
There is a lot that SMBs can do to minimise the risk around late payment before situations arise. Establishing processes such as the following can help:
- Creating proactive, scheduled checks on payments at set intervals after invoicing, and sending prompt reminders after the payment date.
- Running credit checks on new clients and establishing credit terms in advance. These could include laying out payment terms at the proposal stage, including agreed actions that will be taken if a payment is late.
- Don’t give early payment discounts as your customers will expect this every time regardless if they pay early or not – this will erode your margins and harm your cashflow.
- Insisting on past late payments being made before taking on any new work for a client (not letting regular clients “rack up” on account).
- When dealing with a client with huge buying and negotiating power (leaving the SMB somewhat powerless), review alternative cash flow options.
When a bad situation with a client has already emerged, SMBs do have recourse to the law. The Late Payment of Commercial Debts (Interest) Act, which came into force in 1998 (amended by the Late Payment of Commercial Debts Regulations 2013), provides SMBs with the ability to claim compensation for qualifying late payments from other businesses. It also allows them to demand interest on late payments. Taking legal advice to enforce this at the appropriate stage is, therefore, this is also an option.