At a glance
- Small businesses still suffer from crippling late payments from customers
- Recognising and understanding the red flags helps you prepare
- Personalising invoice chasers and asking for help with escalation can be game changing
Late payments can be crippling for small businesses, and unfortunately it remains a huge problem. One survey, by Purbeck Insurance Services, estimated three in four small businesses are awaiting overdue payments at any time.
The government signalled a renewed focus on late payments with the recent appointment of Enterprise Nation founder Emma Jones as the new Small Business Commissioner (SBC), along with new legislation this year introducing stricter reporting and more enforcement against non-compliance.
Increased government pressure on customers to pay on time is a good start, empowering businesses to take stronger action themselves. We spoke to experts for practical advice on protecting firms’ financial health when faced with unpaid invoices.
Recognise the red flags
Certain signs during onboarding can signal a higher risk of non-payment. One common red flag is when a client switches firms under odd circumstances, says Neil Warner, Partner at Gateley Legal. This could indicate that the previous relationship soured over fees. “Effective due diligence is critical to identify and protect against initiating contractual relationships with such clients,” Warner adds.
Clients who do not respond to attempts to agree an invoice or chase a payment, or clients who complain about the service and delivery only after a job has been completed and an invoice raised, are also cause for concern.
Warner recommends watching for signs of financial difficulties, like trying to delay payment until they receive money from someone else. “In our experience, one of the quickest ways to ensure payment in these situations is to send a Pre-Action Letter of Claim to the client, enforcing your contractual rights.”
Prepare for the worst
Most businesses will likely experience late payments at some point, for a multitude of reasons. Preparing for the possibility ahead of time can often avoid later disputes.
Della Hudson, Founder of Minerva Accountants and Hudson Business Advice, says it is important to proactively agree terms that work for both sides. “We start at the outset with engagement letters, as required by our professional bodies, and clear expectations on timescales and responsibilities,” she explains. “We always agree fees up front and, as far as possible, clients are on monthly direct debit.”
Hudson warns against absorbing requests for extra work without question. Instead, small business leaders should respond with something like: ‘Yes and that will cost £X per hour’. This ensures that everybody understands the fees up front, the business doesn’t provide free work, and clients don’t get nasty surprises.
Warner adds that a business’s terms and conditions should cover expectations and requirements with regards to payment, including:
- Your ability to raise invoices
- Your payment terms (e.g., whether to be made in total or in increments across certain milestones)
- Any credit terms that you may be willing to offer
- Limits to liability
- How disputes will be managed (e.g., mediation, or agreeing on arbitration rather than through the courts).
Where possible, he adds: “Avoid incorporating set-off provisions, as these may allow a customer to offset your invoices against alleged damages in the event of a dispute or a claim.”
Prioritise invoice follow-ups
For Hudson, personalising invoice follow-ups can be a quick and easy way to navigate the issue. “The first chaser is just a courtesy, checking that they’ve received our invoice and that everything is all right. We refer to the fact that we’re a small business and our families always appreciate when we get paid promptly.”
“Some accountants are worried that they’ll lose a client if they chase too hard but are they really a client if they’re not paying?”
Della Hudson, Founder, Minerva Accountants and Hudson Business Advice
It can also help to be creative. “I had a client who used to send poems to chase unpaid invoices, and I’d love to write some for Minerva.”
Automating invoice chasers via financial management software such as Xero, which can be tailored with wording and frequency to suit any style, can also save time.
If the invoice reaches one month overdue, Hudson sends a seven-day letter warning of legal action – and follows through when necessary. “I always charge the statutory small business interest and debt collection charge as I believe it is important that companies understand the costs of paying small businesses late.”
Hudson adds: “Some accountants are worried that they’ll lose a client if they chase too hard but are they really a client if they’re not paying?”
Ask for help, if escalation is needed
Kate Canning, Gateley Legal Partner, says a managed credit control process that engages with clients at an early stage and steps in as soon as invoices go over terms can make all the difference.
Where debts involve large amounts, however, you should always instruct solicitors and make sure that a client is able to pay before pursuing them via a legal route.
For longer or ongoing projects, Canning recommends planning to raise interim invoices at certain timescales, to better manage your cash flow. “It is also easier to spot problem payers earlier when unpaid work in progress starts to build up.”
Finally, says Canning, if you have exhausted your credit control process, don’t give up. “There are still legal avenues available to you to recover monies and enforce contractual terms, whether that is issuing statutory demands or initiating court proceedings.”
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