Even chasing these late payments can also be a drain on your already stretched resources, taking time and money away from other areas of your business. Putting ground rules in place can help you protect your business and your bottom line, as well as preserving those precious relationships with your clients. So, with this in mind let’s explore some helpful tips to ensure your invoices are paid on time, every time.

Make Your Invoices Clear And Professional

Writing up invoices can be time-consuming and incredibly dull, and this is often reflected in the end result. Dull, boring invoices can easily be overlooked or forgotten about, causing you a bigger headache later on. Updating your invoice software and utilising invoice templates will help you create eye-catching, memorable and high-quality invoices within seconds. Customisable templates will also help you build a strong business identity, with bold logos on professional-looking documents that will encourage loyalty to your brand, as well as better recognition.

Automate Your Invoices

Automating your invoices every month helps in two ways. Firstly, you’ll know that the job has been done and it’s one less responsibility you need to oversee. Secondly, when your invoices are automated, clients can’t claim that they didn’t receive your invoice or that it’s been misplaced. Automation leaves a digital paper trail that can’t be ignored or disputed.

Be Willing To Check In

Of course, some payments are often late, due to a lack of organisation and forgetfulness on your client’s part. If payment is late, it’s always worth checking in with your client, to enquire. While reaching out and chasing payments can sound daunting, there are gentle ways you can prompt or remind clients about outstanding amounts without being aggressive, such as calling to enquire about their satisfaction with your services and if they haven’t paid because something wasn’t quite right. Most of the time, clients will feel embarrassed at their oversight and pay you straight away.

Set Clear Expectations

You want to get paid on time, but if you fail to stipulate this in your payment terms, then your clients won’t know this. Stating your payment terms as early as possible, and reminding them of your guidelines when you send out your invoice, will ensure payments are on time and overdue payment collections will be avoided.

Highlight Your Willingness To Pursue Legal Action

This doesn’t have to get personal! In your payment terms, it’s important that you also highlight that you’ll be willing to take legal action if payment terms aren’t met within a certain time frame and after a certain number of reminders and warnings have passed. Stating these terms as early as possible keeps everything professional and clear.

Final thoughts…

Follow these tips to ensure your invoices are paid on time, every time.

The analysis suggests that businesses typically agree 45-day payment terms from completion of work or delivery of goods. Despite this, almost two-fifths (39%) of invoices issued in 2019 (worth over £34b) were paid late, an improvement on 2018 when 43% of invoices were paid late. However, the number of days an invoice was paid late in 2019 has doubled to 23 days from 12 days in 2018. Invoices paid late were typically larger in value (£34,286) than those paid on time (£24,624).

Long payment vs Late payment

There is a distinct difference between these terms. Long payment terms refer to the time contractually agreed between parties when invoices will be settled for goods and services provided. Whilst sometimes lengthy, they are a reality of doing business. Businesses can plan to cover these cash flow gaps and manage their working capital using either cash reserves or finance tools like invoice finance. Late payment refers to the additional time taken to settle invoices, outside of those contractually agreed at the point of purchase. This is an unknown and unexpected element which can significantly impact cash flow, business plans and even in some cases paying staff or creditors.

Bilal Mahmood, External Relations Director at MarketFinance, commented: “It’s great to see that fewer invoices were paid late in 2019 but worryingly, those that were paid late took twice as long as in 2018, up from 12 days to 23 days. Late payment practices harm business cash flow, hampers investment and, in extreme cases, can risk business solvency. Separate research we’ve conducted highlighted that 87% of businesses are prevented from taking on more orders because of the cashflow constraint owing to late payments. Overall it seems who you are doing business with and where they are based is important to know for a small business if they need to forecast cashflow”.

“Government measures such as the Prompt Payment Code and Duty To Report have helped create awareness but need more bite.  Until this happens, there are ways for SMEs to fight back against the negative impact of late payments, from having frank discussions with debtors that continuously fail to adhere to agreed payment terms, to imposing sanctions on those debtors, or seeking out invoice finance facilities to bridge the gap.”

Sectors

Professional and legal services businesses suffered the most with late payment in 2019. Seven in ten (70%) of invoices were paid late, up from 30% in 2018. Manufacturers (57%), retailers (49%) and creative industries businesses were also heavily impacted by late payment of invoices. Interestingly, late payment practices improved for companies working in the utilities and energy sector with only a third (34% of invoices being paid late in 2019 compared to two-thirds (66%) in 2018.

Regions

The number of invoices paid late to companies by region was fairly evenly split. Notably, businesses based in the South East (56%) and Northern Ireland (55%) had the highest number of invoices paid late in 2019 and late payment practices worsened from the previous year.

The biggest improvements 2018 vs 2019 in late payment practices were in North West (63% vs 37%), North East (60% vs 40%), Scotland (62% vs 38%) and the South West (61% vs 39%). Additionally, businesses in the North East (25 days vs 11 days) and South West (33 days vs 10 days) had more than halved the number of days an invoice was paid late.

Countries

The analysis looked at invoices sent to 47 countries by UK businesses. US companies were the worst late payers, taking an extra 51 days to settle invoices from agreed terms in 2019. German firms took a further 32 days and businesses in China took an additional 10 days. Interestingly, French, Spanish and Italian businesses halved the number of days they paid late from 24 days late in 2018 to 12 days in 2019.

Bilal Mahmood added: “SMEs owners have come to expect long payment terms but late payments are inexcusable. For every day an invoice is late, it’s more time spent chasing payment. This means less time for business owners to focus on growing their business, coming up with innovative ideas and hiring more people, or just paying their staff and bills. Things need to change quickly.”

“We want the UK to be the best place in the world to start and grow a business, but the UK’s small-to-medium-sized businesses are hampered by overdue payments. Such unfair payment practices impact a business’ ability to invest in growth and have no place in an economy that works for everyone.”

In its latest report Late Payments: The Cost to Business and Our Health, Hitachi Capital UK has investigated the mental health impact of late payments on the UK’s SMEs and freelancers. The research finds that there is an urgent need for action to alleviate the emotional and financial burden of the issue, acknowledged by Government as an inhibitor to the growth of the UK economy.

From a sample of 1,000 SMEs and freelancers based in the UK, a sizeable 11% of surveyed freelancers have been diagnosed with a clinical condition due to clients failing to pay invoices on time. This figure equates to over 200,000 freelance employees in the UK^₂, with the most common conditions anxiety (61%), stress (45%) insomnia (41%) and depression (27%).

In addition to highlighting the harmful effects of late payments, Hitachi Capital UK’s research outlines the prevalence of late-paying clients for freelance businesses. Two-thirds (65%) of respondents have experienced at least one instance where a client has failed to pay within an agreed payment period.

The research has exposed the drain of late payments on productivity and resource among freelancers, who are now spending an average of 77 minutes each day chasing clients. Almost half (49%) of freelancers are spending 1-4 hours each day chasing late payments, losing valuable time to grow their business and service existing customers.

The majority of freelancers surveyed were unfamiliar with the preventative measures available to them, with over a third (35%) unaware that interest can be claimed on late payments from clients. Similarly, only 15% of freelancers are aware that late paying clients can be taken to the Small Claims Court.

Robert Gordon, CEO of Hitachi Capital UK, said: “The current focus on Brexit has detracted from some of the most pressing issues affecting SMEs. It is high time that we hold poor payers to account for failing to pay on time and in full, acknowledging the effect that cash flow shortages can have on the wider health of the economy.”

Hitachi Capital UK’s extensive research has already found that that late payments are costing almost a third of SMEs at least £10,000 a year; with 40% of SMEs having used their own money to close cash flow gaps within their business. An overwhelming majority of these respondents (80%) invested their own savings to cover operational costs and keep their businesses afloat.

Commenting on the findings, Simon Blake, Chief Executive, Mental Health First Aid England, added: “Being self-employed or working in an SME can present a number of challenges to our health and wellbeing - including the pressure of managing a consistent cash flow. The link between late payments and mental health issues is a worrying trend and requires quick action to ensure that people are not left to suffer in silence.

“This is one of the many reasons why we are working towards a future where people in every type of community have the training and resources to support their own and others’ mental health. People from all walks of life - whether working as freelancers, in SMEs or in larger businesses – should be empowered to seek and offer support if they are struggling with their mental health.”

Of greater concern is the impact of late payments on the long-term health of the UK economy, which is estimated to have cost UK SMEs at least £51.5 billion in the last 12 months, but the true figure is likely to be much higher.

The new research from Hitachi Capital UK has determined the financial burden on the UK’s 5.6 million SMEs as a result of late paying customers and uncovered the extent to which an epidemic of late and unfair payments is hampering productivity and growth.

Over a quarter of SMEs (27%) have experienced a profit squeeze because of late payments, and 12% have had to defer staff pay, equating to an estimated 1.95m UK employees that are left empty-handed on payday.

With many SMEs already struggling to maintain liquidity, the research highlights the extent to which late paying customers represent a drain on resources. Around 40% of respondents have been forced to use their own money to address cash flow gaps in their business. The vast majority of these respondents (80%) have invested personal savings to keep their business afloat or operational.

Critically, the research exposed a need for SMEs to take measures to maintain cash flow over the course of the year to mitigate damage caused by unreliable customers. Nearly three quarters of SMEs (74%) have had a customer fail to pay during their agreed terms at least once during the last 12 months, and 34% of SMEs report customers using their position to delay or reduce payment.

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With 21% of SMEs also turning down a contract because a customer was known to be a bad payer or offering unfair payment terms, the use of external funding options is an increasing necessity to offer a safety net when business is stalling. Today’s research indicates that awareness of potential solutions such as invoice finance remain too low.

Robert Gordon, CEO of Hitachi Capital UK, said: “An imbalance of power between clients and suppliers, often driven by larger players abusing their position, has led to a widespread late payment culture that is damaging UK SMEs. As our research has shown, if we let this go unchecked, huge numbers of businesses will continue to experience cash flow pressures at a time of wider economic uncertainty.

“This has ramifications not only for SMEs, but for entire supply chains and a fair, competitive and supportive business environment is critical for the country’s wider economic success. It’s imperative that we not only acknowledge this issue and crack down on late payments, but also take practical steps to ensure businesses are given the required support and penalties are put in place for the worst offenders.”

The findings come amid a range of new Government measures – proposed by the previous Government but currently on hold – of tougher sanctions to address late payments, including greater powers for the Small Business Commissioner to enforce best practice and revisions to the Prompt Payment Code. Of those surveyed, over two-thirds of SMEs (68%) would support legislation making it illegal to miss a payment deadline, with over half of respondents (57%) spending nearly a day a week chasing outstanding invoices, suggesting that late payments are contributing to the productivity deficit within the UK economy.

In analysing the sector landscape, professional services was identified as one of the worst offenders, with 17% of SMEs identifying this grouping as a leading culprit for late payments.

The South East was the region with the highest proportion of SMEs reporting financial issues caused by late payments, representing 18% of the total number of responses, followed by Greater London at 16%.

Andy Dodd, Managing Director, Hitachi Capital Invoice Finance, added: “As one of the UK’s leading finance providers, we understand first-hand the impact that late payment can have. Many SMEs struggle to maintain liquidity and this remains an underlying threat to their personal finances and ultimately the survival of their businesses.

“Fortunately, there are a number of solutions available to small businesses. Firstly Invoice Finance which provides an immediate advance, normally of up to 85% of the invoice value, to provide instantaneous cashflow injection. Secondly, using a good credit control provider, perhaps aligned to Invoice Finance – it’s an area that frequently neglected, but should be front-of-mind amongst SMEs.”

Below Finance Monthly hears from Catherine Rickett, a debt recovery manager at Roythornes Solicitors, on the topic of avoiding debt, especially at Christmas.

It’s pretty common for people to overspend at this time of year, and most will focus on spending money they don’t have on presents for their loved ones, rather than pay off the debt owed to you.

December can therefore be a tough month for businesses, particularly SMEs who might feel the impact on their bottom line more than a large corporate firm. For companies focused on footfall, the increase in online shopping may mean that sales have declined; your own outstanding invoices are due or income may be affected by closing over the holiday period. Added to all that is the extra pressure of parties, bonuses, and holiday pay.

The UK’s ‘late payment crisis’

Recent figures released by the Registry Trust confirm that, during the third quarter of 2018, 32,629 County Court Judgments (CCJs) were registered against businesses in England and Wales. This equated to a total of £100.2m being owed by commercial entities and represents an increase of 32% from the previous year. The average commercial CCJ has a value of £3,072, and the total figures show that if you have even one debt owed to your business, the impact could be detrimental if you do not have measures in place to protect yourself.

Further to this, annual research by Bacs Payment Schemes, part of payments authority Pay.UK, found that the country’s SMEs could spend up to £6.7bn this year in order to get back money owed by customers, up from £2.6bn in 2017.

When it comes to the festive period and late payments, the absolute worst case scenario is that your customer’s business fails in the New Year before you’ve been able to collect payment, leaving you completely out of pocket.

1. Know your client! The best way to protect yourself from dealing with potential insolvency is, above all, to know your client, and to put in place a few precautions. Consider undertaking a credit check on new or even existing customers if you are having difficulty in obtaining payment. It may be that your customer is unable to make payments due to their own financial problems. Account application forms are an excellent way of identifying your customer from the outset. You need to know who you are contracting with in order to pursue the correct person later on if necessary. It’s very simple to carry out a free check of the insolvency register before allowing a customer credit, and credit checks can be undertaken for a relatively low fee.
2. Make it easy for your clients to pay. The easier you make it, the more likely is it that they will pay you. Consider having card payment facilities, BACS, direct debit, online payments or even PayPal. Be proactive about collecting payments from clients. Have solid, late-payment penalties and collections polices in place, and stick to them. Ensure that you keep copies of correspondence with the client including call logs, emails, letters and proof of delivery or collection. These may prove invaluable if the matter proceeds to court.
3. Consider applying an incentive for early payment. Money is better in your pocket than in your debtor’s and whilst you may feel uncomfortable lowering your prices for early payment, sometimes it can cost more to recover a debt than any discount applied.
4. Have clear procedures. You need effective systems in place, with standard letters going out the day after an invoice is due and then seven days after. These are very simple procedures to implement but effective – they not only give you a paper trail but act as a polite reminder for clients where an invoice might have slipped through the net.
5. Keep a ‘cushion’. Ideally three months’ operating expenses will protect you from unexpected cash flow issues. Bad payers are a business reality and if your company is working from an account balance of nil, one slow sales month could mean instant disaster.

If you do happen to find yourself in the unfortunate situation of being unable to recover your money, there are a few general things to be aware of, which could help allay your concerns over the costs of recovering the debt. If you have a term in your contract for interest, then you must adhere to it. Otherwise, for commercial debts, the Late Payment of Commercial Debts (Interest) Act 1998 gives protection to businesses which are owed money by other businesses in terms by assuring interest is payable at 8% above base rate.

In addition to this, you can claim late payment compensation and recovery costs under the Late Payment of Commercial Debts Regulations 2002 and 2013. These regulations provide that, as a supplier, you would also be entitled to a fixed sum of compensation as follows:

• £40 for a debt less than £1,000
• £70 for one between £1,000 and £10,000
• £100 for debts over £10,000

Costs incurred by creditors when instructing a lawyer or debt collection agency are recoverable, however, once the matter proceeds to court, it will be for the court to decide what costs are payable, dependant on the type and value of the claim.

If the debt is paid, but paid late, you are still entitled to claim late payment compensation and interest up to six years later.

Research from Dun & Bradstreet reveals that UK businesses prompt payments deteriorated in in the three months to June (Q2). On average, less than a third (31.5%) of payments were made on time compared to 31.3% in the previous quarter. The average payment delay in the UK is around 15 days, two days higher than the European average.

Dun & Bradstreet’s UK Quarterly Industry Report shows a clear split by sector, with ‘Health/Education/Social’ and ‘Finance/Industry/Property’ recording the sharpest deterioration in payment performance (down by 1.7% and by 1.4% respectively quarter-to-quarter). However, more positive results were recorded for the Consumer Manufacturing sector which demonstrated the largest improvement, followed by the ‘Eating and Drinking’ (0.8%) and ‘Materials Processing/Mining’ (0.6%) sectors.

Late payments remain a significant problem for UK-based small- and medium-sized enterprises (SMEs). On average, larger companies of 251 employees or more only paid 8.1% of their payments promptly, compared with smaller companies of 250 employees or less, which averaged at 25.7% for paying their suppliers on time.

Commenting on the results, Markus Kuger, Senior Economist at Dun and Bradstreet said: “What is perhaps most worrying from the data is the sheer volume of late payments UK-based companies are having to contend with, not least as a result of weaker retail sales and the uncertainty of the impact of Brexit on businesses. Although there is legislation in place to assist small businesses with their struggle against late payments, the majority of the time they take no action for fear of alienating their larger customers. Late payments affect businesses across the sectors and of all sizes and give rise to tighter financial conditions and higher administrative, transaction and financial. With continued uncertainty for the foreseeable future, it is likely that we will see further deterioration in prompt payments due to rising headwinds triggered by the Brexit vote.”

(Source: Dun & Bradstreet)

Dun & Bradstreet and the Small BusinessResearch Centre have revealed a community of small and medium enterprises (SMEs) who are confident that the UK is a great place to start a small business (72%), but face a plethora of challenges in a rapidly changing political, regulatory and economic landscape. The study found that UK SMEs see late payments, uncertainty around Brexit and a fluctuating pound as potentially detrimental to growth, with 54% confident about future success.

Although keeping ahead of the competition and attracting new customers remains a key priority, SMEs are concerned about the impact of Brexit: almost one in three respondents (32%) said it has affected their confidence negatively. A third (35%) of those surveyed have cancelled or postponed expansion plans as a direct result of the Brexit vote, while 34% admit that they have rewritten their business plan in response to the ongoing economic and political uncertainty.

In this time of heightened uncertainty, over a quarter (26%) of SMEs also highlighted timely payments as the most critical factor for financial success. Respondents indicated that at any one time, they are owed an average of £63,881 in late payments, with 11% saying they are owed between £100,000 and £250,000. The consequences of late payments include cash flow difficulties (35%), delayed payments to suppliers (29%) and reduced profit performance (24%). Some respondents have even had to dip into their personal savings to cover the shortfall. And the problem is growing - more than half (51%) of SMEs say late payments are more of a problem than three years ago, with 58% going as far as to say this issue is putting their business at risk of failure.

“Late payment of debts is a perennial challenge for SMEs” explains Professor Robert Blackburn from Kingston University’s Small Business Research Centre, “This seems to worsen during difficult economic times. Although many SMEs are able to tighten their belts during an economic slowdown, late payment adds further pressure on cash flow.”

While SMEs face many challenges in the current environment, the study revealed a positive outlook amongst the small businesses surveyed. Even with the backdrop of unprecedented turbulence, most SMEs still have a clear business strategy prepared (70%). And they believe their business has a bright future in the UK, with three quarters (75%) saying they are confident they can achieve financial growth in the next five years.

“It was reassuring that the majority of respondents still think Britain is a great place to start a small business, and most believe they’ll enjoy success in the coming years.” says Edward Thorne, UK Managing Director of Dun & Bradstreet. “There’s no doubt there will be bumps along the road, but this is positive news for the overall health of the UK business environment.”

(Source: D&B)