Thousands of businesses fall victim to the late payment ‘epidemic’. Recent research from Creditsafe has revealed that during 2016, more invoices were paid late than on time, with 56% paid beyond agreed terms in Q4 alone.
Late payments have become a prominent cause of cash flow issues among companies today, and particularly SMEs. These businesses rely heavily on a healthy cash flow to function, and when it’s stagnant, problems can multiply.
Cashflow woes can have a detrimental effect on both time and revenue. Research from Bacs has highlighted that 42% of SMEs suffering from late payments spend up to 4 hours a week chasing them. Meanwhile, in a survey by the Federation of Small Businesses, 17% of SMEs claimed they hadn’t been able to resolve a payment dispute. If one thing’s clear from the emergence of this late payment culture, it’s that cash is, and always will be king.
Because late payments are now so common, there is a feeling among some businesses that there is nothing you can do to protect yourself. However, there are in fact several safety nets that can be put in place to help keep problems at bay.
Before doing business with a company, it’s vital to credit check. We live in a world where we’re lucky enough to have access to modern online business information systems like Creditsafe’s, which allow companies to check all the financial and payment habits of the businesses they deal with in one click.
Most importantly, Days Beyond Terms (DBT) can be reviewed to find out how long a business typically takes to pay. However, while alarm bells should ring if they’re consistently paying late, this shouldn’t necessarily rule out doing business with them as there may be extenuating circumstances or reasonable reasons behind this.
Also, consider that it’s possible to accommodate another company’s payment terms or adjust your own management of cash flow. If a company’s average DBT is 13 but you want to be paid within 30 days, try changing your invoice term to 15 days. By being aware of a company’s payment habits beforehand you will have the information required to make an informed decision.
Moreover, it’s important to consistently monitor credit ratings throughout any business relationship. Credit ratings and average DBTs can quickly change, particularly amidst the uncertainty of the current economic climate in the UK.
Research alternative invoice processes
It’s key to review the structure of your own business and assess what works best for you. Everyone’s business is different and not all are suited to the same accounting models; there are numerous options out there.
While the traditional accounting model works for some, modern technologies have welcomed new digital accounting models. Spend time investigating all the invoice finance processes available because using an alternative model might suit the structure of your company better, helping to streamline the invoicing process.
Meanwhile, make sure you’re issuing invoices on time and promptly. It’s a two-way street, there’s no use demanding prompt payments if you’re invoicing late!
Communication is key
Although it might sound simple, commercial contracts need to be clear. Communicate terms from the get-go. A contract should cover payment terms and the penalties for late payments, with no ambiguity or potential loop-holes. In addition, don’t be afraid to apply penalties for late payments and make sure they’re sufficient. A contract is a means to protect a business from late payments and potential cash flow issues, so it should set terms out clearly before a business relationship begins.
If a payment is missed, contact the company immediately. Communicating and working together is more beneficial than arguing or sending debt chaser letters too hastily. By talking through issues and factoring in time for leeway, there’s often more chance of receiving payment. However, if communication is failing and you’re not getting through, then be prepared to chase.
In summary, it’s likely that every business will have or will at some point be stung by the late payment culture that unfortunately exists in the UK today. However, with the right amount of research businesses can put themselves in a position to minimise risk and combat the associated issues should they be affected.
Rachel Mainwaring, Operations Director at Creditsafe