How to ensure your small business gets paid on time

It’s a common scenario for many small businesses – a full and growing order book, and a high volume of seemingly happy customers, yet a seemingly endless struggle to secure payment on time, and an ‘aged debt’ which is having an impact on cashflow.

The problem of late payments for small businesses is not a new one; it’s an issue which the Federation of Small Businesses (FSB) has been campaigning on for more than 10 years now, and the FSB’s latest report suggests that it doesn’t seem to be improving.

The report found that a quarter of businesses in the supply chains for public infrastructure projects experience late payment more than half the time. This supports the Federation’s previous research, which found that small businesses are owed on average £6,142, mostly by larger firms not paying them for goods and services on time.

Writing recently in the national press, FSB chairman Mike Cherry highlighted the scale of the problem in the UK compared to other countries. The £14bn owed to small firms here by businesses that do not pay on time is more than anywhere else in Europe, and around 5p in every £1 of UK revenues is written off because of poor payment practice, compared with 4p in Greece and less than 1p in Finland.

The FSB’s concerns are echoed by Liberis, the small business alternative financing specialists funded by the Government-owned British Business Bank. A survey of small businesses by Liberis found that 58% are owed up to £10,000, and over 25% are owed more than £20,000, with half of all businesses saying that their outstanding debt has hindered them from investing.

Additionally, 72% of the surveyed small businesses said they spend up to three days a month chasing money due to them – costing on average £11,000 per year in time spent chasing payments – yet 40% of small business owners said they do not have a clear debt recovery procedure.

What steps can you take?

So what can be done to improve payment terms for small businesses? While the FSB is right to call for a ‘culture change’ and stronger enforcement of the Prompt Payment Code, there are steps that businesses themselves can take to improve payment terms on their invoices. Below are five things you can do to increase your chances of getting paid on time.

• Do your research – the biggest businesses must now report their payment practices online (which has led to several lists of the UK’s worst companies for failing to pay on time), so if it’s a large company you’re dealing with, check their performance on payment. If it’s a smaller customer, talk to local contacts or colleagues in the industry to see if any mention specific problems.
• Be clear about payment terms – spell out when you expect to be paid for the work you do at the outset, to avoid any confusion later, and also set clients’ expectations.
• Invoice as soon as the goods are delivered or work is complete, and make sure your invoices are clear, accurate and easy to understand – list what you’re charging for, make sure you include any agreed fees, and submit it to the person who will be paying it (which is often not the person you did the work for). Don’t forget to note your company bank details on the invoices. Make it as easy as possible for your customers/clients to pay.
• Don’t just sit back and wait – have a clear debt recovery procedure. Follow up invoices with timely reminders about payment when they are due and as soon as they become overdue, and don’t be afraid to pick up the phone; it’s not a fun job, but talking directly to debtors often brings the best results.
• Consider automated invoicing processes – most accounting and business systems software packages will now send automatic invoices once jobs are completed, will follow up with reminders, and will then send overdue invoices or statements of account, as well as highlighting trends of late payment from particularly clients or sectors.

No businesses should have to endure persistent late payment, especially when those practices can have such a damaging effect on cash flow and business growth. While a wider cultural change may be some time coming, there are steps that you can take to improve your chances of getting paid on time.

This post was written by Price Bailey’s Head of Credit Control, Karen Buttrey. If you would like to know more then please contact Karen using the form below.