How can SMEs avoid late payments?

Friday 7th January 2022

Late payments can be a major headache for small businesses. Not only do they cause significant disruptions to cash flow and potentially losses if they’re never resolved, they also require a fair amount of effort to chase, which further costs time, resources and money. In the UK at any one time, almost £30bn is owed to small businesses, and each year these small businesses will spend more than £10bn combined in order to resolve the situation with businesses that owe them money. 31% of small businesses are regularly paid late.

As a result, it’s imperative that all small enterprises follow all of the best practice advice to reduce the likelihood of late payments, and resolve the situation when it does happen. Let’s take a look at some of the most important things that any small business should think about.

How SMEs can avoid late payments:

  1. Credit checks
  2. Clear terms
  3. Straightforward payment
  4. Internal processes
  5. External help

1. Credit checks

Arguably the most important process is in the proper selection of customers. In industries where it is the norm for payments to be on 30+ day terms, it is essential that small businesses check who they’re dealing with. This might not be feasible for smaller accounts in larger volumes, but where a business is accepting large orders, credit checks can be particularly valuable. They’ll illustrate the creditworthiness of the customer, and flag up any potential risks in the account. They’re one of the best ways of reducing risk - dealing with reputable companies should result in prompt payment. There are of course costs associated with credit checks, but they’ll usually pay for themselves in the long run.


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2. Clear terms

Many late payment issues are caused by companies that are looking to push things as far as they can - or see what they can get away with. This is much easier where they don’t have set payment terms to work with. Invoices should always come complete with thorough, binding payment terms and these should be made clear as early as possible. This should include things like due dates and payment methods - everything that someone might use to get out of paying on time.

3. Straightforward payment

Making the process straightforward will also help reduce the likelihood of late payments. Different accounts departments will have differing preferences, and the more options they’re presented with in terms of making payment, the more likely they are to make it quickly. Proprietary payment portals and processes might seem like a good idea as far as internal operations goes, but if it makes things even a little bit more difficult for the customer’s accounts department, delays in payments can be expected. All options should be on the table for customers who want to pay.

4. Internal processes

On the subject of payments applications; having thorough processes for tracking where payments are is also important. It can be easy for invoices to slip through the net, and if they aren’t chased, then they may not get paid on time. Businesses should always have a defined process for what they do with invoices when they’ve been submitted, a method for flagging them when they’re late, and a structured process for resolving this. Most business accounting software will allow for this, and it’s something that all businesses need - physical paperwork is simply not effective.

5. External help

Where things have become particularly strained, further steps may be necessary to secure payment. In late 2017, the UK Government set up the Small Business Commissioner (SBC), which is an office specifically designed to help those smaller enterprises that struggle with late payments - particularly when they come from larger businesses. Advice and mediation is available, and the SBC can put businesses in touch with professionals that can help work out a solution to the issue. Beyond that, there are also collections services that can attempt to recover the money you’re owed, but these should be a last resort. Invoice finance which is a product that, for a fee, gives you the value of invoices as soon as they’re raised with a customer, is another option. The collections process can also be outsourced to these finance providers.

Ultimately, ensuring late payments don’t become too much of a challenge is about having a structured approach to dealing with invoices; dealing with the right customers, having the right paperwork, and following the correct procedure. And small businesses in particular should know that there is help available should they need it.

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