Dealing with late payment can be tricky for small and medium sized businesses. Handle it wrong and a customer could be lost, ignore the issue and it can stifle business growth, have a huge impact on cash flow and even cause a company to go bust.
Staggering figures published in a government paper, revealed that small businesses spend around 130 hours a year chasing late payments, equating to an average cost of £1,500 per business.
The problem is endemic with two thirds of SMEs suffering according to research by the IOD, but follow this 12-Step plan and you’ll be able to minimise the damage late payment causes your business.
Don’t bank roll your customers
The scale of the late payment scandal in the UK is getting worse not better, despite the high profile campaigns to stamp out the problem.
Suppliers are bank rolling their customers for an average of 103 days from the point they issue an invoice, before they threaten legal action with a Letter Before Action (LBA) according to Lovetts data.
This is a 24% increase on the amount of time the same sample waited in Q1 2014 when the time from invoice to LBA was 83 days. However, the good news is that a growing number of businesses are now using the Late Payment Act to recover significant sums and clamp down on late payers.
How the Late Payment Act can benefit businesses
The Late Payment Act allows any business paid late to claim interest for the period the debt was overdue, plus compensation, if their contact terms allow it.
The entitlement to claim interest and compensation remains for six years on each and every invoice (or payment point) paid late, unless clear assent is proven against the claimant. That means you can recover compensation of between £40-£100 per invoice, plus reasonable costs on any debts, which are now paid, but were paid late over the previous six years.
There has seen a gradual but encouraging rise in the number of businesses using the late payment legislation to claim compensation and interest from their customers for overdue invoices.
More businesses are using late payment legislation to claim compensation
In 2005 just 1% of Lovetts’ clients were claiming compensation, now the proportion has risen to 24%. The need for payment appears to be overcoming the fear of damaging client relationships.
Fundamentally firms need to make clear that legal action will be taken if a debt is not paid. The payment terms also need to state that any costs and interest incurred as a result of chasing late payment will be charged to the debtor.
12-Step Action Plan to prevent and tackle late payment:
With late payment being such a big issue, you need to do all you can to make sure your customers take you seriously and pay you on time.
Here’s a 12-Step action plan for small businesses to put the ground rules in place to help prevent late payment, as well as the tools and tips for recovering debts when customers fail to pay up;
1. Set clear expectations with customers
First, make sure your customers know you WANT to get paid on time. State your Terms and Conditions clearly, include how any overdue payments will be dealt with.
State that the full cost of any debt recovery activity necessary to secure overdue payments will be added to the invoice.
2. Ensure invoices are received
Too many companies give wrong signals, by failing to check that invoices have arrived safely and are on their customers’ ledgers. Send an invoice by email to your contact and to the accounts payable department at the same time.
3. Make it clear you will take legal action
Tell customers early on, as part of good relationships, that legal action WILL be taken against non-payers. It doesn’t need to get personal at this stage, just clear.
4. Summarise the potential costs of non-payment
ADD UP the costs of going legal early on i.e. interest, late payment compensation, indemnity costs under contract (make sure your T&Cs allow for this). TELL the customer what that figure is.
Explain your reluctance to escalate costs unnecessarily. £1,200 debts can easily grow by 50%, and businesses owe it to their customer to point it out.
5. Send a ‘Late Payment Demand’ if you aren’t paid on time
If you have not received payment by the date the invoice falls due, you should issue a “Late Payment Demand” (LPD).
Late Payment Demands (LPD) show the late payment compensation and interest on the debt at the pre-action stage. This makes it clear to the customer the costs they will face, in addition to the debt, if they don’t pay up.
The LPD is sent by a solicitor and makes it clear that they have been instructed to pursue compensation and interest on the debt. In 80% of cases an LPD can elicit a response or payment.
6. Follow up with a ‘Letter Before Action’
If payment is still not received, the next step is to issue a Letter Before Action (LBA).
An LBA is the last resort before taking a claim to court. It sends a strong message to late payers and gives them one last chance to settle their debt.
It should state the amount and include any compensation and interest to be claimed. It should also have a date to indicate when the debt needs to be paid.
And finally, it should offer a reminder that you will start court proceedings if they don’t reply, which could incur extra costs.
7. Consider a draft Winding-Up demand for larger debts
Use a draft Winding-Up demand for debts over £750 against companies, not just a letter!
If you are worried about their financial stability, and need to move fast, consider investing in a letter enclosing a draft Winding-Up petition. It makes maximum impact straightaway. It carries the risk of public advertisement.
8. Phone the debtor
Make a telephone call before you issue a Claim to remind them of the escalating costs that will result in court proceedings.
9. Ensure your Claim includes all costs and compensation
Make sure you tell your legal representatives to include your contractual costs, compensation and interest if you are entitled to them all.
10. Enquire to see if they want to avoid Judgment
After the Claim is issued, ask the debtor if they want to pay to avoid Judgment which will hit their credit rating. Over 50% will. Make sure you get all the costs, interest and compensation above.
11. Specialist solicitors can advise on disputes
If any issues or disputes arise with your debtors, obtain fixed-fee advice from a specialist solicitor before sending an LBA.
The advice will give you a better understanding of your legal position and the strength of your case. It will also set out tactics to resolve the case and the likely costs of taking legal action before you get sucked in unnecessarily.
12. Being tough pays
Remember – being tough this time might save you the bother next time.
Businesses need to adopt a robust approach to recovering debts and that means understanding all the tools available to them. As the business climate improves, it is important that invoices are paid on time. Without a strong cash flow it can be hard for a business to reinvest and grow in the future.
About the author
This guide has been written for ByteStart by Charles Wilson, Chairman of, Lovett’s, a legal firm focused solely on commercial debt collection and commercial litigation, supporting a wide range of businesses including sole traders and SMEs.
More cash flow and financing help
For more help and tips here are a few of our other popular guides to help you to get customers to cough up in good time;
- 7 ways to make sure your business gets paid on time, every time
- Collecting overdue payments – a step-by-step guide for small businesses
- What to do when a client refuses to pay or can’t pay
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- The pros and cons of invoice finance and factoring for small businesses
And these will help you with business funding options;
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- Finding finance for your new business – funding advice for start-ups
- How peer-to-peer lending offers startups and businesses a new funding option
- The secrets of getting a business bank loan
- What are business angels and how they can help fund your business?