Late payment of invoices is an endemic problem for small firms, as despite government attempts to reduce the problem, without any mandatory penalties the practice is unfortunately still rife.
According to data taken from Companies House, micro-businesses, defined as having less than 10 staff and a turnover below £2 million, were proportionately the hardest hit. In the last financial year they waited on average a staggering 63 days for payment, over double the typical 30-day agreements.
These types of firms were also saddled on average with £68,000 worth of trade debt, with late payment being a major contributing factor.
Against this backdrop, I would offer five pieces of legal advice on how to improve credit control measures to help keep company finances in a stable condition:
- Research customers before doing business with them. Carrying out checks before extending credit is a basic, but often overlooked, credit management tactic. Remember, not knowing anything about a business may significantly increase your risk of accumulating past-due bills. Examining bank and trade payment references will help to decide if it is safe to do business with them.
- Improve customer communications. Make contact a week before the due payment date to ask them to confirm payment will be received on time. If payment is late, have standard letters ready to send out detailing what is owed and when the final deadline for payment is.
- Send a solicitor’s letter demanding payment. If a customer is continuously ignoring your calls to pay up, a simple £2 solicitor’s letter can prompt them to settle their invoice in full in just seven days. The authority of the letter and threat of legal action is what encourages payment.
- Charge late payment interest and compensation onto money owed. Annualised interest charges of up to 8 per cent can be legally added onto bills each day an invoice is overdue. This will not only improve your business cash flow, but will make it crystal clear they should avoid being late on payments in the future. Plus, compensation charges of between £40 to £100 can also be added, depending on the size of the debt owed.
- Find out if the customer is self-employed. If they are, it means they are personally responsible for their debt. This legally entitles you to look into the option of seizing their personal assets to reclaim the equivalent sum of the money owed. But this option should only be used in exceptional circumstances, where your business is under threat as a consequence of habitual late payment.
One final message we would give to all manufacturers suffering from late payment is "don’t write off your debt". Where it is deemed necessary, legal action to professionally recover it is proven to work and can help strengthen credit control processes.
☛ Mark Burgess is chief operations officer at Debt Guard Solicitors