Late payment is an ongoing issue for small and medium-sized enterprises (SMEs), with a lack of legislation – and limited resources to enforce that which does exist – meaning many are unable to take action against larger customers.
It’s an unequal relationship, and one that larger businesses know and regularly exploit to improve their own cash flow. And the problem is getting worse; according to the most recent FSB Small Business Confidence Index, published in March 2024, the proportion of businesses facing late payment rose from three in five (61%) in the third quarter of 2023 to nearly two in three (66%) in the following one.
The impact this has on small firms, which account for around 61% of employment in the UK, according to research by NatWest, is severe. It finds that 27% of SMEs are owed between £5,000 and £20,000 in unpaid invoices, and 31% of businesses spend 21-30 hours every month chasing invoices. A separate study by Sage puts the cost of chasing invoices at £6.7bn a year, while 44% of respondents to the NatWest study say they also experience cash flow issues due to not being paid on time.
For SMEs, it’s vital that they do all they can to ensure that invoices are paid on time. The good news is that there are steps they can take to help with this, and give themselves the best chance of avoiding some of the issues associated with late payment.
Get the basics right
A good starting point is to make sure that SMEs do not give customers a reason to pay them late. “Good credit control starts at the beginning of the relationship,” points out Tammy Evans, a partner at Ignition Law.
“Businesses need to make sure that the services provided to customers are properly documented at the time of contracting, with a clear paper trail showing what has been ordered and the specifications of that order including, where appropriate, the time for delivery. If these basic practices aren’t followed, then the slightest chink or hole in the paper trail will be used as an excuse for non-payment.” Basic credit checks should also be performed to flag any financial issues before the relationship progresses too far, she adds.
Then there’s the invoice itself, which needs to include the correct information, including payment references, VAT details and the correct company name. “Invoices should set out a clear timeframe within which payment is due, and you may wish to include provision for interest on late payments when you send out terms and conditions at the outset,” suggests Deryn Fisher, a solicitor at Parfitt Cresswell.
“The fact that costs will continue to rise will often focus a customer’s mind on payment.” Where possible, it’s a good idea to use the goodwill at the start of a relationship to get at least some payment upfront, she adds.
Credit control
SMEs need to identify and act on any cases where invoices are overdue. “Build a relationship with the accounts payable teams with key customers,” suggests Abbey Watkins, an accountant in the funding team at accountancy firm Kreston Reeves.
“Understand their payment cycles and try to co-ordinate your own. Know when and who to chase, and chase regularly until payment is received. Your customers are likely to be doing the same and will not be offended by gentle reminders. The longer you leave unpaid invoices, the harder it will become to chase.”
"Know when and who to chase, and chase regularly until payment is received"
An effective accountant can help here, particularly for those organisations that may not have their own in-house function. “Having a really great, supportive and fully qualified and regulated accountant is key for SMEs,” says Adam Harper, director of policy at the Association of Accounting Technicians (AAT), which has been lobbying the government on the topic of late payments to SMEs for over a decade. “You want someone in your corner helping divert any late payment issues before they even arise.”
Consider factoring
Should an outstanding debt prove problematic, it may be worth selling that debt to a factoring company, essentially swapping the problem of recovery for a reduction in the invoice value. “The factoring company effectively owns the debt and independently seeks payment for the full value, providing an uplift minus their fees if full recovery is possible,” says Evans.
“This can be quite a dynamite move as the relationship with the client is usually destroyed but then a client which doesn’t pay invoices is not usually worth retaining anyway.”
The legal route
Finally, there’s the possibility of legal action. “If an invoice has not been paid because your customer is unable to pay its debts, then a winding up procedure can be pursued,” says Evans.
“If there is any degree of dispute regarding the unpaid invoices, then a business will need to find an alternative route, such as issuing a court claim for recovery. The impact of these routes both in terms of management time and legal fees should not be underestimated, however.” It’s also important to consider whether it’s likely that the defendant will have assets to pay the sum and any costs of recovery, adds Fisher.
