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Avoiding the Late Payment Trap

Although SMEs comprise more than 99% of private enterprise and 60% of all private sector employment in Britain, small business owners often experience cash flow challenges that result in a struggle to survive as a business and the looming prospect of debt.  Many small businesses struggle in the UK culture of late payments, especially by larger businesses.  There are initiatives to address this, such as signing up to the Prompt Payment Plan, but stamping out late payments is a battle that’s yet to be won here in Britain.  Ultimately, punctual payment relies on other businesses/customers getting their act together, but there are steps you can take as a small business owner to smooth the process.

Unless you’ve agreed on payment terms at the start, the law does not consider a payment as late for business transactions until 60 days have passed from the date that the customer receives the invoice or the supplier delivers the goods or service.  This means that if you rely on payment to be settled in fewer than 60 days, you need to set clear expectations of this from the beginning. 

When discussing business with new customers, make sure that all of your emails, invoices, T&Cs clearly state your required payment terms (14 days, 30 days – whatever you prefer for your business) and add a warning that there will be an additional 10% fee in the case of late payment.  This means that the customer cannot claim ignorance as you’ve been clear about this from the beginning. 

When the initial payment term (however long you’ve chosen) has passed without payment, send a friendly email reminder that payment is required by end of day.  If there is no response, send another email the following day with the 10% late charge added and a warning that you expect to be paid within 7 days. 

Don’t be embarrassed to chase up small amounts of money – it’s all too easy to avoid the hassle of requesting amounts less than £100 but, as a small business, that amount represents a significant sum to you.  If you’re a B2B company, you can add £40 compensation to an invoice of up to £999.99 under the Late Payment of Commercial Debts (Interest) Act 1998.  For invoices involving more than £1,000 the compensation charge is £70 and for invoices over £10,000, you can charge £100.  These charges apply per invoice which means that multiple unpaid invoices can carry multiple late payment charges.

However, if your customers are domestic (rather than commercial), then treating them in this way could backfire.  You need to consider your business reputation and, while charging for late payment may bring in a little extra money, there is a risk that customers will spread the word, especially on social media platforms, which would harm your business in the long term.  Instead, consider asking for payment in advance or at the point of delivery (you may need to get a card reader in order to do this) so that you’re sure of being paid without risking negative publicity.