Almost a third of SME’s suffer late payments from customers

posted by 3 years ago in Features

A recently survey by Hitachi has unveiled the true extent of how late payments are impacting business owners in the UK – costing an estimated £5bn to the SME sector annually.

The research showed that rather worryingly, 40% of business owners have used their own personal money to plug the gap in cash flow left by late payers, a scenario that might be familiar to our readers.

Key findings

  • New research from Hitachi Capital UK* finds that late payments are costing UK SMEs an estimated £5 billion
  • 40% of SMEs have used their own money to close cash flow gaps within their businesses
  • 68% of SMEs would support legislation that makes late payment illegal
  • 57% of SMEs spend at least an hour a day chasing outstanding invoices and late payments
  • Over a quarter of SMEs (27%) have experienced a profit squeeze because of late payments, and 12% have had to defer staff pay
  • A fifth of business owners say they did not pay themselves when they were left with unpaid invoices

The challenge of late payments can be crippling to a business, particularly a small business with less wiggle room between income and expenditure. Often when winning new business, an SME will need to invest in materials and additional resource to service the contract and this can be daunting when you have no payment history. What if you hire more staff, and the client does not pay?

Reducing your risk to late payments

Although it can be a real worry, there are some steps that you can take as a small business owner that can go some way in reducing the risk of landing a client who does not pay you on time.

Look at your contracts

It pays in the long run, to invest time and money into ensuring that your agreements with clients are formal, written and watertight – particularly in relation to payment terms. Clearly setting out in your contracts the interest and penalties that would be due for late payment, and ensuring that your contracts are correctly signed by someone who has the authority to enter into a contract could save a headache further down the line should legal action become necessary.

Credit check your client

A number of tools are available for credit checking prospective clients and their track history for making payments on time. Although this is only applicable to limited companies, you won’t have the benefit of this information if working with a sole trader or partnership. A newly formed limited company may also have little or no payment history logged.

Do your homework

Spending a little time undertaking some desk research, could help uncover any potential ‘red flags’ with a prospective client. You can look up information about a company and its directors using Companies House WebCheck system.

Signs to look out for – is the company up to date with its filings? Do any of the directors have a high number of previously liquidated companies, particularly in the same industry or in a short period of time? These can sometimes be warning signs that there might be trouble ahead.

Payment on receipt

Many suppliers do not give credit to new customers until a certain period of time has lapsed – sometimes three or six months of payment history before offering NET30 payment terms. In some instances, if appropriate, you may wish to request upfront payment in part. This is particularly common with website agencies, tradesman and manufacturers who routinely ask for 30-50% of an invoice before undertaking any work.