Are late payments crippling small businesses?

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Poor cash flow management is one of the biggest small business killers around, and it is hugely frustrating when the cash flow is affected through no fault of the business’s own.

Yasmine Bachir is an outreach executive at RocketMill, undertaking research and writing articles on a range of topics. She has always been passionate about working within the business and finance sectors, and these have always been her favourite topics to undertake. Yasmine enjoys having a job that is also a passion, and she hopes this comes across in her work.

Small businesses have it tough within their industries, especially in the months and years before they have gained a foothold in the marketplace with a dedicated customer base. They have to develop relationships with suppliers, advertise themselves and conduct their business perfectly with all outside parties in order to create a positive impression that will keep people coming back. However, even when they have succeeded in doing all of that, they will still be faced with one problem which is prevalent in small business dealings: getting paid on time.

A 2014 YouGov poll suggested that late payments affect around 85% of small businesses in the UK, and they have knock-on effects that contribute hugely to a negative rate of cash flow. Poor cash flow management is one of the biggest small business killers around, and it is hugely frustrating when the cash flow is affected through no fault of the business’s own.

For example, you might have a regular outflow of cash that goes on utilities such as lights, water and internet, but you might be expecting a payment from a client to come in that will be used to pay those bills. If the payment never arrives, a cash flow gap appears, the bills cannot be paid and you won’t be able to conduct your business unless you siphon the funds from elsewhere. This causes confusion, and the situation is rapidly becoming untenable – the current amount owed to small businesses in the UK in late payments is around £41 billion. Whether the customers who owe money are having their own cash flow problems is irrelevant. You can only be concerned with the effect their non-payment is having on your business.

Are other factors also to blame?

This isn’t to say that there aren’t other factors that might be affecting the cash flow of a small business. An unexpected expense (if all of the networked computers become infected with a virus that necessitates the purchase of new ones, for example) could put the business in trouble, as could seasonal sales fluctuations that mean there are slower periods when the business’s income levels decline. These are similar to late payers in terms of the fact that they cannot be prevented, but their effects may not be as significantly felt given that a customer paying for goods or services is always going to be a business’s main and most regular source of income. If that is cut off, the business will flounder. It seems clear that late payments are significantly affecting small businesses in a negative way, so what can be done about it?

Solid payment agreement

Various measures can be employed to increase the chances of a customer paying on time without damaging your relationship with said customer if it is a long-term one. A solid payment agreement where expectations and deadlines are clearly laid out is the first step to take – this offers a reference point to ensure that there is never any confusion about what is expected when. Customers will have their own copies of the agreement to refer to, and your business will be able to cite it in the event of any disputes arising, legal or amicable. Ensure that the agreement states that you reserve the right to make use of the government’s late payment legislation once a certain point has been reached without payment being made.

Concrete payment chasing timelines

Although it’s recommended to set out the terms of payment clearly for the customer to reference, you should have your own timeline that specifies when you begin chasing up late payments, how you do it and what your legal options are. For instance, the first reminder letter or email should be sent a week after the payment due date, and things should continue from there. Devising a system that can be followed in most if not all situations should be a priority for any company having trouble getting payments made on time. Don’t discount the power that potential legal action has when it comes to getting what is owed to you, but remember that ultimately you’re always going to be relying on other people to make these payments. In certain cases it may be best to cut your losses and resolve not to deal with persistent late payers in the future.

Yasmine Bachir

Yasmine Bachir is an outreach executive at RocketMill, undertaking research and writing articles on a range of topics.