Q&A: managing late payment
Henry Ejdelbaum, managing director of AIMS Accountants for Business, shares tips on dealing with late payment, while remaining professional
Is late payment still a big problem for small businesses in the UK?
Henry Ejdelbaum (HE): “They remain the bane of the working life of many a small-business owner in the UK. According to research Zurich SME Risk Index I read about in April 2017, more than half of the UK’s 5.4m small businesses have been affected by delays and late payments, which was estimated to be worth £44.6bn. So, yes, late payment remains a big problem for many small businesses.”
What are the key causes of late payment?
HE: “Sometimes a trade customer is waiting to get paid by their customers, in which case you may have to show some patience, without being expected to wait too long. In other instances, shamefully, some business customers – often large organisations – deliberately delay payment to benefit their own cash flow. Occasionally being a few days over is one thing, but always paying late, long after payment is due, is quite another. Late payment happens in business, but you can make it less likely and minimise your exposure.”
How can late payment affect a small business?
HE: “Depends on the number of late payers and how much they owe, but even if it’s a small amount, you still have to waste time and effort chasing payment. If the problem is worse, it can cause more serious cash flow issues for a supplier, which can even lead to the failure of that business where large sums of money are owed.”
What can small businesses do to protect themselves?
HE: “Firstly, they need to be cautious when granting credit. Your terms shouldn’t be too generous; if possible, only grant large amounts of credit to customers when they’ve earned it, say after six months. Small businesses also need to have systems in place that alert them, shortly before a payment is due, so they can remind the customer.”
When should an unpaid invoice be chased up?
HE: “Following a polite reminder? On the day it’s due, and you should find out exactly when it will be paid, hopefully immediately. Some caution is advised, because the reasons for late payment can be genuine. You should remain professional throughout and friendly, although your customer needs to know you need them to pay their invoice. For high-value orders, to mitigate risk and ease cash flow, you should ask customers for part-payment upfront.”
What if a customer continually pays late?
HE: “This can be frustrating, but ultimately you must make a call about whether you want to continue to have them as a customer. Depends on how much they spend and how badly their late payment affects your cash flow, but some customers can be more trouble than they’re worth. In some cases, invoice finance can ease your cash flow in such cases, but there are fees to pay.”
Can I charge interest on late payment?
HE: “Clients often ask us this question. By law, you can charge 8% plus the Bank of England base rate for late payment of business-to-business transactions, but you can’t claim statutory interest if a different rate of interest has been agreed within a supply contract. In reality, charging interest can require more time and effort than it’s worth and you do have to consider the likely effect on your relationship with the customer. Better to focus on getting paid, only apply interest if you’re owed a lot of money and are not too concerned about keeping the customer. If there are serious issues with getting paid, there are debt-collection agencies, which, for a fee, can save you time.”
What if a business customer goes bust?
HE: “If you’re owed money, you’ll have to register as a creditor. Unfortunately, in such cases, creditor lists tend to be long, with preferred creditors, such as staff owed wages, who get paid before unsecured trade creditors, so, you could get nothing at all. That’s why credit control is so important, because late payment can turn into non-payment, which really can cause serious problems.”