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Late payments and lengthy payment terms can threaten the survival of small businesses. We explain what you can do about it.
It’s no secret that the most dangerous time of life for a business is in its first five years. The majority (55%) of small and medium-sized enterprises (SMEs), don’t live past their fifth birthday.
Insurer RSA says there has been a significant downward trend in one-to-five year business survival rates since the recession and that the majority of small companies face a multitude of business threats.
Cashflow and late payments top concern for small businesses
In its recent ‘growing pains’ report, late payments and cashflow issues were cited amongst the top concerns for small businesses, with 35% of report respondents naming this as a top worry.
This issue is echoed by the Federation of Small Business (FSB) – a campaign group for small firms and the self-employed– which spoke out recently about further deterioration in UK payment practices.
The FSB said one of Britain’s biggest businesses, Premier Foods, had requested a compulsory ‘investment payment’ to be made by any company wishing to stay on its approved supplier list. While Premier Foods’ decision grabbed headlines and attracted significant press attention, this is just one of countless examples of payment practices that have the potential to make life difficult for small businesses.
Billions of pounds owed to small businesses in late payments
In fact, Bacs Payment Schemes said the overall level of late payment owed to SMEs stood at £34.9 billion in July 2014 – equivalent to around £38,200 owed to each small business. Meanwhile, the European Commission holds late payments responsible for the loss of nearly half a million jobs a year.
According to Steven Renwick, the founder of Satago, a platform that allows firms to automate credit control and cut down on time spent chasing invoices, the real-time picture of late payment is bleak. An analysis of 100,000 invoices processed in Satago over the last three months showed most (55%) are being paid late, with 23 days being the average length of late payment.
“Everyone wants to work with big firms, so they can get away with whatever payment terms they want. It also slows company growth. Late payment forces small companies to capacity and to absorb the late payment meaning they can’t grow,” Renwick says.
Barnaby Lashbrooke, MD at Time etc, a company which acts as a virtual pay-by-the-hour assistant, says chasing invoices for his clients is a common request and the scale of the problem is ‘quite scary’. He says his clients can at any time be owed £50,000 from their customers – and this is in businesses that turn over £200,000 a year.
So what, if anything can be done if you are a victim of late payments or ‘unfair’ payment terms?
Government steps in to shake-up payment practices
The Small Business, Enterprise and Employment Bill published by the government in November is attempting to address the problem through legislation. In its current consultation, it has shied away from dictating payment practices to British firms but instead is proposing companies report on their payment performance including the proportion of invoices paid over 30, 60 and 120 days, and the average time taken to pay.
But the CEO of the Institute of Credit Management (ICM) believes it’s cultural change not legislation that is the panacea for late payments. Philip King says he’d like to see businesses everywhere recognise they have a corporate responsibility to treat suppliers fairly and adopt it as a ‘fundamental business principle’.
While this harmony may yet be a long way off, David Knowles of Creditsafe – a supplier of company credit reports – suggests taking time to understand your customers and their payment behaviour. He says: “If they’re paying late, you can take that knowledge into your next negotiations.”
7 ways to ensure you get paid on time
1. Before you enter into a contract do your homework on the company. Check their credit ratings to make sure they’re creditworthy.
2. Before you sign a contract, check if the company is signed up to the Prompt Payment Code. This will help you identify the better-paying businesses and plan your cashflow accordingly.
3. State payment terms on the invoice and put them upfront in the contract. Also state you use the late payment legislation to collect. If you are entering into a contract with a known late payer, put on your invoice that you share payment performance with credit agencies.
4. Send the invoices as soon as you’ve completed the work. Don’t wait until a week or two after you’ve completed the work, delaying your payment unnecessarily.
5. Once you’ve sent the invoice do a follow-up to make sure it was received. This acts as a subtle payment reminder and will nip in the bud any potential issues with the work enabling it to get sorted sooner.
6. Consider outsourcing the payment of invoices to someone disconnected from any potential ‘embarrassment’ of chasing payment. This will prevent outstanding debts being built up.
7. And finally, a sale is not a sale until the money is in the bank. Consider the risk against the cashflow of the business: if it has the potential to put the business in jeopardy, proceed wisely.
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