Q&A: Dealing with late payment

Martin Dunne of Sayers Butterworth chartered accountants offers advice on how to deal with late payers and bad debts

Just how common a problem is late payment?

It’s always been there, but in the current economic climate it’s more common. Information presented to Parliament by the Forum of Private Business in April 2013 suggested that over one million SMEs had experienced slow or late payment. Cashflow is still tight for many businesses. Consequently, as firms must wait longer for their customers to pay, they delay paying their suppliers. It’s a vicious circle… Even the best customers may let you down – no matter how good your relationship or their intentions.

How badly can late payment affect me?

It can put you out of business. The key danger is failing to act, so a late payer turns into a bad debt (ie they never pay). Another fatal mistake is to continue to provide goods/services to a late payer after they ask for more time. The debt grows, month after month, and sometimes it never gets paid. The end result is that an initial £5k outstanding invoice becomes, say, a £20k bad debt, which can have disastrous consequences.

What pre-emptive steps can I take to prevent late payment?

Always send your invoices out on time and chase customers as soon as their invoice becomes overdue. Put in a quick telephone call to ask when you will be paid. At that stage you must be firm, but not heavy-handed. You need to have a process – basically, a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails.

Initial credit checks can help, too…

Indeed, that's why you should credit-check all new significant customers, but be warned – this is not always effective. A customer may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Avoid granting too much credit to too many customers over too long a period, and ask customers for most of the money upfront if you’re dealing with large sums.

How important is it to make sure customers know my payment terms?

Include them in large, bold writing at the foot of your invoices, with your bank account details – then customers can’t make excuses. It should prevent them from using the old ‘cheque’s in the post’ stalling tactic. Make sure any customer contracts are very clear about your terms.

Should I be monitoring payment-due dates?

Yes, it’s critical. If an invoice is not paid on the due date, phone the customer the next day to chase payment. Letting days and weeks go by in the hope a customer will pay you is a big mistake. Know when your invoices are overdue and act immediately.

Is there any such thing as payment being ‘acceptably late’?

Not really – it’s easy to put things off because you don’t want to upset customers, but the wellbeing of your business is more important. Also, it’s about establishing good habits. If you let customers pay your first invoices three months late, they’ll always expect to pay them three months late. Stipulate 28 days and start as you mean to go on.

What if a customer says they don’t have the cash, but will pay next week?

Obviously, some customers will experience cashflow and finance problems, it happens. If so, agree a strict deadline for payment and explain that, if they don’t meet that deadline, you may not be able to continue supplying them until they settle their bill. You may also want to mention that you may soon need to start charging interest, which you’re legally entitled to do.

What if a few weeks go by and I’m still waiting?

You might need to involve a solicitor or debt-collection agency. Sometimes involving a third party is enough to make difficult customers pay up – although you should expect them to take their business elsewhere in the future.

And what happens if my customer goes bust?

Your chances of getting any money back are virtually nil, because after a business goes bankrupt the first to be paid are the secured creditors (those with a fixed charge over the company assets). They are followed by the preferential creditors (which includes employees), creditors with a floating charge and finally the unsecured creditors (including HMRC), that’s if there’s any money left in the business. Assume you’ll get nothing and then if you get something – usually a few pence for every pound you’re owed – at least that’s something. Most times you will end up with nothing – which is why your credit control measures must be effective each and every time.

For further information on late payments, see:

You can also find out about your legal rights when you are owed money on the Law Donut.