How to avoid late payers

Finance experts have lifted the lid on best practice guidelines so small company owners can avoid the perils and stalemate of late payment.

The age-old problem typically involves large well-resourced companies failing to promptly pay invoices sent by their smaller suppliers.

In some instances, small businesses are being forced to wait up to 64 days simply to receive payment for services already rendered, FSB research shows.

“While bigger companies have a larger pool of finances as a cushion against cash flow difficulties, smaller companies don’t have this luxury so it is vital for them to avoid dealing with late payers wherever possible,” said David Robertson, of Bibby Financial Services, which has published the guidelines.

He said the lax attitude of some large paying companies is causing a ‘make or break’ situation for their smaller counterparts, who as owner-managers are dependent on timely return of invoices.

Rather than stalling payment to small companies and thereby threatening their very existence, Robertson claims big businesses should be “setting a good example.”

But, he conceded, the timid nature of some small firms could be escalating the problem.

“Many small businesses feel backed in to a corner by the demands of their larger customers, as they can ill afford to loose a large contract which makes up a significant percentage of their revenue.

“Large firms have a responsibility as good corporate citizens to offer fair business terms and conditions to their smaller counterparts.”

Freelancers and owner-managers are urged to implement and enforce the following guidelines so they avoid being trapped with a lax paying client:

o Credit check potential customers – while it is tempting not to check a new customer’s credit history, to save time, it is vital to carry out these necessary checks to ensure your customers are able to pay you for your goods or services

o Terms and conditions – designed to protect your rights, limit your liabilities and provide you with some security, terms and conditions need to be clearly stated on all relevant documentation to both existing and new customers

o Payment terms – these need to be set at the beginning of a relationship with a new customer and followed up with written confirmation, this way every party knows where they stand

o Invoice on time – send invoices immediately if you don’t you can’t expect to be paid on time. Clearly address the invoice to ensure it reaches the correct person along with when the payment is due

o Crystal clear communication – keeping on top of regular communication with your clients and suppliers is key. Follow up invoices with a call to confirm receipt and advise clients of any outstanding payments

o Keep clear documentation – keeping clear records and having a good filing system will ensure you are aware of payments due and are able to keep track of them

o Understand your rights - if you have a long outstanding payment, consider charging the client interest. As a small firm, the law gives you the right to charge interest on all late payments owed to you. The rate you can charge is the Bank of England base rate, plus eight per cent

o Review credit checking procedures – aim to run credit checks on your existing clients on a bi-annual basis to ensure their financial situation has not changed

o Encourage fast payment – encourage your customers to pay on time, offering early payment discounts if they pay within a certain credit period

o Consider the finance options – services such as invoice finance can boost a firm’s cash flow by raising finance-based on the value of sales invoices, paying up to 85 per cent of those invoices as they are raised. The invoice financer will also chase outstanding payments on your behalf.


11th April 2006

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