Posted: Wednesday, 5 October 2011 @ 10:07
Getting your bills paid on time is vital to the financial health of your business. It’s often quoted that at least 10% of business failures in the UK are due to non-payment or late payment by customers. Managing your cash flow efficiently could be the key to your business survival.
Not only does late payment cause immediate cash flow problems but it also means additional interest on that company overdraft, put at a staggering £33 million in 2009 according to Barclays. Bacs, the organisation behind Direct Debits, reported that in 2010 SMEs had to wait an average of 41 days beyond their payment terms, over 9 days longer than in 2009.
So what can you do to avoid payment problems?
Here's our 14-point guide for SMEs on how to get paid on time
- Carry out credit checks on new customers, and repeat them on a regular basis.
- Check references from suppliers.
- For each customer, establish a credit policy based on their credit check.
- Establish sound debt collection procedures. The longer you leave a debt the more difficult it is to recover. So chase early with a polite call or e-mail.
- Consider offering discounts for early payment.
- Make sure that you diarise invoices for payment and follow up with regular telephone calls and letters. Make sure you record details of every call. Develop a set of standard format letters with increasing urgency based on how long the debt has been outstanding.
- Be polite. Research has also shown that being polite in your communications, such as saying “please” and thanking them for their business, both in invoices and chasing letters, can increase the percentages of invoices paid by 5%.
- When dealing with large companies, make sure that you speak directly to the accounts department responsible for administering payments.
- Make it easier for customers to pay. Provide BACS details. Perhaps make arrangements for payment by credit card. Or sign up to a pay by phone system such as www.paythru.com. And remember that payments made electronically go through far quicker than cheques.
- If the invoice is disputed for whatever reason, establish the reasons and address the issues as quickly as possible. It may be prudent to obtain early legal advice so that you are sure of your position.
- Make sure your terms and conditions are up to date and include payment terms and interest on unpaid bills, and also suspension of work in the event of unpaid invoices. There is nothing like stopping work and/or suspending deliveries to prompt payment.
- Where you are dealing with a limited company, it may be appropriate to obtain written guarantees from the directors. These should be obtained on or before the contract is established. Guarantees can be incorporated into your terms and conditions to be signed by the directors on their own behalf and on behalf of the company.
- Where you do not have terms for payment of interest on outstanding debts, use the threat of recovery under the Late Payment of Commercial Debts (Interest) Act 1998. You should include this in your chasing letters.
- If you exhaust all reasonable efforts to obtain payment, consider using a debt collection agency or obtain legal advice on your options.
On the matter of interest, if there is no contracted period for payment, and no convention such as 30 or 60 days has been established, then the default period is 30 days. If the parties have not agreed a late payment interest charge, which must be a "substantial remedy" and not a token gesture; it is 8% over the Bank of England base rate. And it is also possible to claim compensation to cover the costs of recovery, £40 if you are owed up to £999.99, £70 if you are owed between £1,000 and £9,999.99, and £100 if you are owed £10,000 or over. Don’t forget that if you have to sue for recovery you can claim this enhanced interest and compensation.
So for example, if you are owed £10,000, and the date of payment under the contact was 1 December 2010, the daily rate will be £2.33 based on a rate of 8.50%, so at 13 January 2011 you will be owed £102.52 late payment interest, and can claim the additional £100 compensation to cover your costs of recovery.
If the customer refuses to pay you can take them to court and claim the interest and compensation, as well as court costs. Even if you have been paid, but paid late, you can still use the law to recover the late payment interest and the compensation.
If the debt is more than about £5,000 it's certainly worth talking advice from a litigation solicitor who will consider the strength of your case and whether it's worth using the court system to recover the debt and your costs.
It's worthwhile including details of your right to claim late payment compensation in your correspondence with the debtor, and in any chasing telephone calls, as this might encourage them to pay up. Tell them how much the interest and compensation will be. Use it as a bargaining chip to get prompt payment.
You should also consider factoring your debts, a service which is offered by banks and independents such as Bibby Financial Services. This may, where appropriate, provide a solution to your cash flow difficulties. A usual deal will provide an advance of 70-85% of monthly invoices for a charge of 0.1-0.3%.
For advice on late payment of business contracts and dispute management contact Nigel Musgrove, Business and Litigation Solicitor on 01285 847001.
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation
to discuss your particular circumstances.