The fallout from late payment can prove devastating for small businesses. Cash flow problems can result in companies incurring overdraft charges or even collapsing.
Small businesses can be especially vulnerable. The most recent Zurich SME Risk Index reveals that 52% of UK SMEs are owed roughly £44.6bn in late payments. Of the more than 1,000 survey respondents, 21% are owed more than £25,000 by late paying clients, whilst 9% are waiting on more than £100,000.
On the plus side, there are preventative measures that you can take. Below we share several tactics that you can adopt to ensure late payment doesn’t become a persistent problem for your business.
Establish your terms from the offset
Make your terms and conditions clear from the outset. As well as issuing invoices, talk every new client through them so that there is absolutely no chance that a misunderstanding could leave your business out of pocket.
You may take this one step further and issue payment terms and conditions to the client prior to your engagement. This will be a signed document highlighting the agreed credit period, in addition to a clause stating your right to charge interest on late payments.
You need to take a firm but cautious approach, as you don’t want to scare off a potential client. At the very least you should make the arrangement clear whilst letting the client know that you intend to claim financial compensation if they fail to pay on time.
Request part payment upfront
There are two key benefits to requesting part payment upfront:
• It helps maintain a healthy cash flow
• It ensures at least some form of financial commitment from the client
When quoting for work to be completed, many small businesses will typically request 50% of the fee prior to the provision of services, with the balance expected within 30 days of the date of the invoice.
Do some background research on new clients
Doing your homework on a prospective client can help you gauge whether or not they are trustworthy, and is a quick and easy process. Records for all UK businesses can be accessed for free at Companies House, whilst other filed documents such as company accounts and annual reports can be acquired for just £1.
Alternatively credit reference agencies such as Experian and Equifax are on hand to run background checks and help you make an accurate decision about how credible a prospective client is.
Charge interest on late payments
One way to help ensure you get paid promptly is to charge interest on late payments. Government guidance states that you can charge statutory interest, which can prove a great deterrent.
This works out at 8% plus the Bank of England base rate for business to business transactions. Bear in mind though that if another rate of interest is stated in the contract, you can’t claim statutory interest.
Offer incentives for early payment
This might not be a suitable tactic for all small businesses, as it involves making a minor financial sacrifice in order to ensure prompt payment. But for those with sizeable profit margins, offering a discount off the total invoice fee providing payment is received on time can be an effective way to guarantee a healthy cash flow.
This needs to be calculated, however. You’ll want to ensure that the discount that you offer is a tempting enough proposition for the client without proving too costly for your company