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Getting paid post pandemic: advice for businesses with overdue debts

View profile for Julie Hunter
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How can a business improve its cash flow?

The pandemic has been a very difficult time for most businesses and while the latest set of restrictions have now largely been lifted in England and Wales, the financial impact of the last two years is likely to last for some time. In such difficult trading conditions getting paid can be a real problem.

The Federation of Small Businesses’ quarterly study of over 1,200 small to medium sized enterprises (SMEs) found that 30% of small businesses had seen late payment of invoices increase over the three months to January 2022.

Of concern is the further findings of this study which suggested that 440,000 SMEs could be forced to close this year due to late payment of invoices, particularly when combined with the ever increasing costs of trading.

The study found that high business costs are affecting 78% of businesses, a seven year high, with fuel and utilities accounting for the highest rise in costs. When national insurance contributions increase later this year, small businesses will be squeezed even tighter.

So, faced with the dual problems of rising costs and late payment of invoices, how can businesses protect themselves against closure by improving cash flow?

In 1998 the Late Payment of Commercial Debts Act came into force. This was mainly implemented to protect small businesses with contracts for supplying goods and services to large corporations, which imposed lengthy credit terms and onerous conditions and took months, if not years, to pay, resulting in small businesses failing because cash flow had run out despite having large outstanding debts.

The 1998 act allows a business to claim interest at 8% and late payment compensation in the form of a fixed sum for every invoice not paid on time, whether it was a year or a day late, and regardless of its value. This is intended to compensate small business for the loss of use of the monies properly due and owing. Businesses can inform their customers that if invoices are paid late, late payment compensation and interest will be payable.

Inevitably, claiming this in addition to the debt due results in the end of the business relationship with the customer and so not all businesses want to claim this from ongoing customers, instead preferring to maintain a good working relationship in the hope and expectation of more business and eventual payment.

So, whilst the act was helpful in some cases, it did not really solve the problem and with the financial impact of the pandemic hitting SMEs hardest, the government is looking at other ways to protect SMEs against the late payment culture of corporations and larger businesses. The problem is small businesses are struggling now, and many may not be able to wait for further legislation to be implemented. So what can businesses do to get invoices paid and maintain cash flow?

Basic credit control procedures are well known but often, just getting these initial steps right can ensure any delays in getting paid are avoided:

  • Make sure you have the customer’s correct name and address; check with your contact the name of the person who is authorised to pay the invoice, so it goes to the right person.
  • Make sure you have quoted the correct purchase order and attach any proof of delivery or signed worksheet to prove the job is complete. These steps will avoid delays caused by the customer asking for more documents before they authorise payment.
  • Send the invoice quickly and as soon as the job is complete.
  • Call the customer to check they have the invoice and everything is in order, ask for a payment date.
  • As soon as payment becomes overdue, call the customer’s accounts payable team and remind them payment is overdue.
  • Keep in touch – you are more likely to get paid if you are constantly chasing for payment.

These measures may not guarantee payment but they are more likely to result in payment from a customer who is able to pay.

For those customers who promise payment but don’t pay, harsher measure will be needed to recover your money. Refusing further services or supplies until overdue invoices have been paid will at least reduce any potential loss and where your customer is only paying their most pressing debts, this approach will send you to the top of their list. 

Where all else fails, instruct a debt recovery solicitor to send a formal letter before action, threatening court proceedings. Our experience is that these letters do result in payment. Contact us on 0161 696 6170.