Late payment and how to ease the cash flow pressure

Here, we look at the problem of late payment, who it affects the most and what can be done to conquer it.

Late payment, and the subsequent pressure it puts on cashflow, is a frequent bugbear of small companies, and the problem could be worsening.

Suzanne Smith, senior associate in the litigation & dispute resolution arm of BP Collins feels that late payments or non-payments are becoming more frequent among SMEs and appear to have increased over the last five or so years.

‘Although many finance departments are becoming increasingly proactive with outstanding debts and late payments, it still remains a large problem within the UK,’ she says.

Arnab Dutt is managing director of Texane, which manufactures polyurethane wheels. He feels that the worst offenders on late payments are the larger multinationals. ‘If you are a small business and you want to deal with these bigger companies you have to accept their Dickensian payment terms, which are typically 60 to 90 days,’ he says.

In many industries, big firms have all the big contracts so smaller companies have little choice but to deal with them. That gives the corporates a big advantage in negotiations, which most of them have no qualms about abusing, according to Dutt.

He adds, ‘Governments all over the world are paying their first tier suppliers on time, usually within ten days in the UK, a policy that is designed to free up capital in the business world and reduce the stranglehold of the banks. It’s a direct response to the stifling of business and investment that resulted from the failure of the financial system and ensuing worldwide recession.’

The fact that governments pay their suppliers so quickly is great news for businesses such as Texane. As a supplier of components for mass transit systems, the company frequently deals with government organisations directly and benefits from those broad-minded payment terms. However, most of Texane’s fellow SME businesses aren’t that fortunate.

‘Of course, governments paying their first tier suppliers on time doesn’t do you any good if you’re a second tier supplier to a large company because they will take the government’s cash but won’t pay you for two to three months,’ says Dutt.

‘So all the small to medium firms in the second, third and fourth tier have to go cap in hand to the banks for overdrafts and invoice financing. That causes hardship and business failures.’

Hanging on to cash that they should be paying to smaller firms gives these companies access to cheap finance, and as a result, many of the large companies are using their suppliers to bankroll their businesses.

Charlie Mullins, CEO of Pimlico Plumbers, says that making sure you get paid for the jobs you do sounds simple, but actually, it’s the number one reason why many viable businesses go broke.

‘Don’t be afraid to ask for payment, and don’t start new work or supply more goods to someone who owes you in the hope that you will be paid,’ Mullins says.

‘Like most businesses we’d always invoiced customers and allowed them to rack up bills on their account, but at one point when we were struggling we worked out that our customers owed us over £80,000. We immediately switched to payment on completion and haven’t looked back.

‘In addition, if a customer knows they have to fork out on completion, they engage more and police the job better, meaning less complaints and less call backs.’

What can be done about the problem?

The Late Payment of Commercial Debts (Interest) Act, which came into force in 1998 (amended by the Late Payment of Commercial Debts Regulations 2013) provides SMEs with the ability to claim fixed compensation from £40 to £100 for any qualifying late payments in business-to-business contracts other than excluded contracts. Additionally, it gives organisations the ability to demand interest on late payments (currently 8.5 per cent). The start date of when the interest on the late payment runs from depends on various factors including whether it has already been agreed by the businesses.

Recently, for contracts made on or after 16 March 2013, the new Regulations have also given organisations the ability to claim the reasonable costs of recovering the debt in the case that the reasonable recovery costs are not met by the fixed compensation sum. It is now far more likely that SMEs will pursue proceedings against debtors or instruct solicitors. For larger debts, many SMEs will consult their solicitors far quicker than in previous years as they understand that failure to do so may be critical for their business. 

Although this legislation protects SMEs against late payments to an extent, businesses should ensure that they keep an eye on debts and late payments at all times, says Smith. ‘Of course, a SME’s cash flow will be less than that of a larger organisation therefore each payment is critical – any missed payment may potentially result in the SME not being able to pay bills themselves which in turn will have a major impact on finances,’ she adds.

To protect themselves, SMEs should tighten any existing credit control procedures and ensure that credit checks are carried out on new clients. Any terms and conditions should include a provision that explains when a bill should be paid and what would happen if the cut-off isn’t met including an interest provision. Furthermore, businesses should ensure they go through debtors lists on a monthly basis and if they find debts are becoming larger then speak with the relevant client.

If SMEs find that any clients are being evasive, they should request legal advice or issue a letter to confirm next steps. The use of a fixed fee letter from a regulated firm of solicitors, particularly for a commercial collection can often be highly effective especially if it explains to the client the consequences of going to court.

Invoice finance solutions from firms such as Bibby Financial Services can be used as a way to free up cash flow by releasing existing funds, which are tied up in invoices. As soon as an invoice is issued by the business, the invoice finance provider will release an agreed percentage of the total (most often 85-95 per cent) within 24 hours. Once payment in full is made the remainder, minus a small admin fee taken by the funder, will be released to the business.

One of the main benefits of invoice finance is that it provides a steady flow of cash to small businesses without having to take on further debt. Businesses know when they will receive funds enabling them to make plans to meet their own payment deadlines, as well as building for the future.

David Postings, CEO of Bibby Financial Services says, ‘Invoice finance not only provides working capital to allow businesses to operate more effectively, but funders can help SMEs to take control of invoice payment, credit control and sales ledger management.’

SMEs shouldn’t be afraid to seek assistance when it comes to late or non-payments – failure to do so may just cost the business.

Further reading on managing cash flow

Ben Lobel

Delphine Hintz

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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Managing Cashflow

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