Late payments blight cause major issues at small businesses across the UK, disrupting growth plans and potentially putting companies at risk. The numbers don’t lie – Dun & Bradstreet research shows UK SMEs are owed more than £63,800 in late payments on average, with 11 per cent owed more than £100,000.

Even worse, FSB research shows 50,000 UK businesses cease trading as a direct result of this issue. However, the problem doesn’t stop with the health of a business – it can have a huge impact personally too.

A study by The Prompt Payment Directory shows that late payments impact the mental health of SME owners. More than half (52%) blame poor cash flow for panic attacks, anxiety and depression, while 63% state late payments mean they haven’t paid themselves in quite some time.

The Prompt Payment Code was introduced to help resolve such issues ten years ago, yet late payments continue to plague small businesses. It may have been a good starter for ten but without any legal ramifications for businesses that sign-up yet continue to flaunt contractual agreements, it’s not proven to be the success many would have hoped for.

Clearly, the time has come for your clients to stop accepting late payments as part and parcel of their business lives. Instead, they should follow these simple steps to help create an environment in which this issue is less likely to have a detrimental impact on their company and their health.

Conduct a character audit into prospective customers

It might sound obvious, but the first step your clients should take before entering into a new contract is to do their due diligence. They wouldn’t buy a second-hand car without first researching into its past would they? So why should entering into contractual agreements with another company be any different?

In this digital age, it’s easy to find out whether a potential new customer has a good reputation for paying its suppliers. Of course, not everything is available with a quick Google search, but evidence of a bad reputation will be online – especially when dealing with larger companies. This should therefore be your clients first port of call.

If your clients find that a new customer has picked up a reputation for being a bad payer, their next step should be to talk to their peers. They could have a quiet word with other professionals at a networking event, or even contact close friends who have dealt with the business in question before. Are payment challenges historic? Have things changed? But Even big companies have their financial blips, so they shouldn’t let the past overshadow a potentially exciting new contract.

Agree the right contractual terms

Payment terms can depend on a multitude of factors but it’s vital that your clients only enter into payment terms that are right for their business. They can’t afford to forget that what’s right for a large enterprise may not suit the needs of a SME.

Look at Carillion for example – before its collapse earlier this year it was a ‘notorious’ late payer which forced suppliers to agree to 120 day payment terms. This may seem perfectly acceptable for large businesses, but this type of black hole in an SME’s cashflow can be crippling.

Your clients should therefore have an honest conversation with the business about the payment terms which will be right for their company and draw up an agreement which will be beneficial for all parties. Larger businesses should respect this tenacity and in turn this could not only help reduce the likelihood of late payment but also help drive a strong relationship from the get-go.

Invest time in customer relationships

It’s a common business analogy that people do business with people, not companies. It’s important that your clients keep this in mind at all stages of the customer relationship. Not just an artificial relationship that equates to making small talk over the phone but one that they look forward to hearing from them, even if it is to discuss invoicing. Companies may not realise or even consider the impact late payment has on a business if they only ever see the results of your clients’ work, rather than the people behind it. It’s easy for them to take the work for granted, rather than truly appreciate your clients and the value they can add.

To ensure this isn’t the case, your clients should build a relationship with every company they enter an agreement with. If they are a sole trader, they should be personable and strike up conversation with the people they meet while on the job. If your clients are larger SMEs they should task their finance teams with helping to driving this relationship, ensuring they have the ability to chase payment without being seen as a nuisance. If your clients are in a position where they can even check in after an invoice has been sent to make sure they received it and ask when to expect payment, they go a long way. Why is this so important? It works to create an ecosystem of collaboration and respect in which payment terms are much more likely to be adhered to.

Researching into financial options

Although the above steps will go a long way to reducing the likelihood of late payment damaging your clients, your clients would be naïve to assume their business won’t be impacted by this issue at all. It has a negative impact on so many SMEs so what is to stop it happening to them?

A resilient business is one which has a contingency plan in place for the worst-case scenario which will ensure they continue to thrive. To ensure their business isn’t at risk of closure due to late payment, it’s key that your clients look into the financial options available if and when payment terms aren’t met. This can come in many forms, from traditional bank loans to invoice finance which could plug the gap left by late payment to allow your clients to continue going for growth. It’s even worth them looking at debtor protection – it won’t protect against late payments but will support their business if the issue persists.

Unfortunately, late payments are undoubtedly going to remain a staple in the vocabulary of many of your clients for the foreseeable future. They should therefore make sure they are taking every possible precaution to avoid falling into the trap felt by so many small businesses across the UK. By avoiding late payments where possible, and knowing how to react when the worst occurs, your clients will be more likely to thrive and reach their full potential, rather than watching their businesses spiral out of control due to an avoidable cashflow black hole caused by late payment.

Steve Noble, Chief Operations Officer, Ultimate Finance