Good cash flow is the lifeblood of any business so it’s essential to monitor overdue invoices and act quickly to ensure payment. Failure to act promptly could mean your firm incurs damaging losses if a defaulting customer becomes insolvent and can’t afford to pay you.
There are several early signs that a customer may be struggling financially. Late payment of invoices is an obvious indicator but so is erratic or partial payments. For example, when a firm gets in difficulties it may settle only part of an invoice with a promise to pay the balance the following week or month.
If a firm has several invoices from a supplier, it may pay the smaller bills before the larger ones even if the larger ones are the most overdue.
Delaying tactics also come into play. A firm in difficulty may try to buy time by disputing an invoice and asking for more details about what was supplied. Sometimes they will claim they never received the invoice and ask for a copy to be sent. They may then treat it as a new invoice that doesn’t have to be paid for another 30 days or whatever your standard terms may be.
The government says that delaying tactics like this mean that SMEs are owed £26billion in overdue invoices. According to a survey carried out by the Forum of Private Businesses, late payments are more of a problem than poor sales, restricted bank lending or complying with business regulations.
Many firms are reluctant to take action to enforce payment because they fear offending the customer and losing repeat business.
There may be genuine reasons for non-payment, of course, and firms may have to be given a little leeway. However, some firms exploit the fact that you don’t want to jeopardise your relationship with them and they ignore your polite requests for payment. It is only when you take legal action that they finally take you seriously.
A simple letter written in legal terms outlining the consequences of not settling is usually enough to secure payment. The realisation that you now mean business means most firms will settle very quickly.
For those who still refuse to budge there are several other options available to get them to pay. In fact, firms can turn credit control into a profit-making operation by recovering unpaid money in a way that earns more than enough to cover the cost of pursuing bad payers.
This is possible because businesses are entitled to levy a statutory late payment fee of between £40 and £100 depending on the size of the debt and also charge punitive interest at 8% above base rate.
If this doesn’t make the debtor pay, it may be necessary to issue a ‘court order for questioning’ against the company secretary. This is usually enough to prompt even the most stubborn late payers into action but for those who still refuse to pay, there are other legal avenues available.
Firms shouldn’t be afraid to explore these options. While it may be important to maintain a good relationship with customers, there’s no point in doing business with them if they don’t pay their bills.
Neil O’Callaghan, Solicitor Machins Solicitors LLP