When customers don’t pay their invoices on time, small and medium enterprises (SMEs) miss out on vital funds that should be in their bank accounts – or better still invested in growth strategies for the business.
Research from the CBI suggests UK SMEs are owed over £50bn in late payments at any given time. Moreover, the average business carries £62,000 on its debtor books – a significant amount of cash for many SMEs.
Sara Beaumont, commercial law specialist and director at Woodcocks Haworth and Nuttall Solicitors, offers best practice advice for SMEs to ensure you don’t fall foul of late-paying customers.
1. Get to know your customers
Effective two-way communication is vital in all areas of customer-relations – and especially in reducing the risk of late payment.
The better you know your customers, the better you will be able to resolve any issues regarding delayed payment before the delay escalates.
A strong customer relationship also makes it easier to pick up the phone or send an email to chase a late payment in a friendly and informal manner.
2. Insist on your late payment rights
Setting out your terms and conditions plainly and unambiguously is an effective way of ensuring customers have no excuses to avoid paying up on time. A straightforward statement that you will pursue your rights under late payment legislation sends a clear message to customers who may try to free up their own cashflow by restricting yours.
All you need is a line in your terms and conditions to the effect that you will exercise your statutory right to claim interest and compensation for debt recovery costs under late payment legislation if you are not paid in line with agreed credit terms.
The Late Payment of Commercial Debts (Interest) Act 1998 means you can claim interest at 8 per cent per annum over the Bank of England base rate. Currently, this is 8.25 per cent per annum from the date the invoice became overdue to the date it is paid.
3. Be sure to claim compensation
In addition to interest, you can also claim compensation for every invoice that is not paid by its due date. Compensation depends on the amount you have invoiced.
For late payments of up to £999.99 you can claim compensation of £40 per invoice, rising to £70 for invoices between £1,000 and £9,999.99, and £100 for every invoice over £10,000.
4. Make your invoices foolproof
Invoices should be easy to understand, simply formatted and, above all, accurate. If your bill contains incorrect or contradictory details – such as wrong dates, names or addresses – you will confuse the customer and effectively delay your own payment.
Your invoices should include all the information a customer needs in order to settle the debt – such as the purchase order number, payment terms, due date, delivery date, unit cost, VAT and total amount payable.
Almost all invoices are emailed these days, but if you do send them through the post, always use first class stamps – second class mail not only arrives later but can give an impression of penny-pinching inefficiency.
Also, it’s important for invoices to reference the late payment legislation and the extra costs of payment after the agreed date.
5. Carry out credit checks
Use a digital credit management system to keep track of customers’ accounts and generate automatic reminders when payments are late. In addition, you should implement a collection strategy, for example phoning or emailing before due dates to ensure payment is in hand.
Just as importantly, make sure your employees are fully trained in credit management and debt recovery.
Finally, you can arrange credit insurance cover if a bad debt arises due to a customer becoming insolvent, along with legal expenses insurance which covers the costs of debt recovery through the courts.
Sara Beaumont is a director based at Woodcocks Haworth and Nuttall Solicitors’ Bury office. She specialises in resolving commercial disputes at all levels and deals with a variety of contractual disputes concerning issues with suppliers, customers and professional advisers, as well as insolvency matters.
If you need help with your debt management and recovery procedures, our specialist solicitors are here to help. Please contact Sara on 0161 761 4611 or by email firstname.lastname@example.org