HOW TO AVOID LATE PAYMENT OF INVOICES

If only there was a magic solution to this problem!  Some tips are offered below  which may be of assistance, but none of them is a foolproof or cost-free solution.

In an ideal business world, invoices would all be paid by return, without chasing and without the need for disputes and court proceedings. Meanwhile, back in the real world many business are finding it difficult to obtain overdrafts and credit in the current economic climate, and are therefore holding onto cash for as long as possible.

In 2007 Experian reported that UK businesses are the worst late payers in Europe. The report showed that UK companies took an average 27 days beyond the due date to pay. 

On 9^th June 2008 Experian warned that an increasing number of businesses are in danger of being refused credit as organisations become more selective in who they choose to deal with as a result of the credit crunch.

Of course, late payment of invoices is not a long-term solution to credit and cash flow problems.  It just wastes time and energy, and can ultimately damage business relations and trust between companies. It will also result in a poor reputation, and poor business credit score, and new business contacts are increasingly likely to start carrying out credit checks before doing business.

Many major retailers are notorious for their late payment policies, and benefit by holding onto millions for as long as possible.  Certain large supermarkets have been reported to keep businesses waiting around 120 days for payment. Regrettably, small business are among those first and hardest hit by increasing late payment trends through the supply chain. 

So what can small businesses do to escape the trap of the late payment culture?

All small businesses should now be making plans if they have not already done so to cope with the change in the economy.

There is some support from the law, in the form of the Late Payment of Commercial Debts (Interest) Act 1998 which provides that interest can be charged at 8% over bank base rate from 30 days after the due date.  Research shows that this has had some effect in improving payment timescales.  However, a small business might well be reluctant to jump in and charge interest for fear of damaging business relations for the future.

There is the option of factoring and invoice financing to assist with cash flow, but of course that does not come for free.

Developing systems for rigorous and early credit control is the best way to avoid problems.  Payment terms should be made clear, usually by stating them on the invoice.  Keep in contact with customers, make sure they are satisfied and give them the opportunity to raise any payment problems early.  Carrying out credit checks before you do business can sometimes be worthwhile, as of course can making your own informal investigations among your business contacts before allowing too much credit; often if a debtor has not paid it is because the business is insolvent and there is no money to pay with.  Finding ways to avoid doing business with companies already in financial difficulty is just common sense. 

You can keep ahead of the game by doing your own research.  The internet is a mine of information on major UK companies and their average payment times.  For example www.paymentleague.com lists UK Plc and FTSE 100 companies and ranks best and worst payers, identifying those that are improving and those that are worsening.

The other option is to instruct solicitors to recover your debts.  When the company’s own attempts have failed, and things have gone past the stage of worrying about business relations, a strongly worded solicitors letter to the debtor threatening court proceedings, and warning that interest and costs will be payable if the matter goes to court, will often apply enough pressure to result in payment.  The costs of a single letter will usually be worth paying if the debt is a reasonable amount. The company has the benefit of having the matter taken out of their hands and has time to get on with running their business.

If a solicitors letter does not result in payment, solicitors have the expertise to advise the company on the next step which is whether or not to take the matter to court.

Sandersons solicitors deal with the recovery of commercial debts from their offices in Hull and Beverley.

Contact            Paul Grimwood            pgrimwood@sandersonssolicitors.co.uk

                        Stephen Dixon              sdixon@sandersonssolicitors.co.uk

                        Sarah Coates-Madden  scoatesmadden@sandersonssolicitors.co.uk

Sandersons Solicitors

17-19 Parliament Street

Hull

HU1 2BH 

Tel:       01482 324662

Fax:      01482 223110

e-mail:  enquiries@sandersonssolicitors.co.uk

 Source: Federation of Small Businesses, June 2008