Andrea Dunlop, Managing Director at Access PaySuite, writes for Payment Expert on how much impact late payments can have on small businesses, especially at a time of economic strain, and why B2B businesses may be affected the most. 

The new government consultation, which proposes a shakeup of late payments, couldn’t come soon enough for small businesses. 

Ministers say that, despite being ‘proactive in attempting to stamp out the worst kind of poor payment practices’, late payments are still ‘a significant problem’ and, we expect, one that’s only going to get worse as the economic crisis continues. 

It’s estimated that UK businesses are currently owed more than £23.4bn in outstanding invoices, while a year ago, the Federation of Small Businesses (FSB) predicted that 440,000 firms were at risk of closure due to late payments. 

Given what happened in the months that followed, this might have been a conservative figure. The ICAEW found that late payments reached a two-year high in November last year, a sign that many businesses will have found themselves in a precarious position or collapsed because of cash flow problems.

While late payments predominantly affect B2B firms, consumer-facing ones such as cleaning, pet-sitting and construction companies, can face similar problems if invoices go unpaid. 

Understanding the problem is one thing but how exactly do SMEs go about solving it?

The government is right when it says that there needs to be a ‘culture change in payment practices and how businesses deal with each other’. Small businesses rarely have the resources to continually chase late payments from big organisations, and they certainly don’t want to get into a dispute with, and lose, their valuable customers, especially at the moment. 

To enact this cultural change, they need reliable, professional and integrated digital payment systems behind them, which make it easy for their customers to pay on time and to spot warning signs they might fall behind. 

Setting out expectations is the starting point in any customer-supplier relationship. Unfortunately, late payments tend to snowball, so ensuring that customers understand your terms from the start and include everything they need to make a prompt payment – including your details, the amount and a description, the due date and how to pay – is essential. 

It’s important to run credit checks on customers too. While you don’t necessarily have to turn down their business, you can still protect your cash flow – for example, by asking for advance payments before the goods or services are delivered. 

Similarly, don’t be afraid to charge late payment fees as a clear sign to customers that they cannot use delay tactics to protect their own cash flow. Be upfront from the start, including the details in your contract so both parties know exactly what’s expected of them. 

Under current rules, you can charge 8% plus the Bank of England base rate per day for late payments, and that a payment is classed as late if the customer doesn’t pay 30 days after the invoice is received or after the product or service is delivered. There may be times when you have to withhold delivery of further services if payment isn’t received. 

Many SME owners worry that chasing payments and charging fees will sour the relationship they have with their customer. But remember that, particularly in large organisations, payments are handled by the finance department, rather than your day-to-day contact. A payment reminder, delivered through your finance system a week before payment is due, is a good way to preempt any late payments in a professional manner. 

As well as penalising late payments, you could consider rewarding customers who pay promptly with better credit terms or a discount. If you’re clear from the start about the incentive, and include it on your invoices and communications, you can strengthen your customer relationships, improve cash flow and potentially win new business. 

While digital payments, including digital wallets, have transformed transactions in the consumer world, they aren’t suitable for B2B payments where customers have up to 30 days to pay. What can be helpful here is a system that supports direct debits, especially for regular payments because they’re more flexible than standing orders and are both secure and convenient for customers. 

Even if customers don’t intend to pay late, cheques can take five working days to clear while Bacs can take three, and both rely on the customer being proactive. Direct debit, on the other hand, is secure and convenient, and you receive an instant payment notification once complete. Alongside this, a system that allows you to take Faster Payments is useful for customers who make one-off purchases because, unlike a cheque or Bacs, you should receive the funds instantly.

An integrated approach to payments, where payments technology is embedded seamlessly into other software used across the business, can help to streamline processes further. Using APIs, payments can be linked to invoicing, accounting or CRM software, enabling much greater visibility of cash flow and overall financial performance, while opening the door to increased automation of these time-consuming tasks. 

It remains to be seen what the outcome of the government’s latest consultation into late payments will be, and we could see the powers of the Small Business Commissioner bolstered to support suppliers. In the meantime, and particularly in a challenging trading environment, firms need to be clear on their payment terms, incentivise prompt payments and use digital tools to ensure seamless transactions.