Collecting late payments is a repetitive problem and the largest risk to long term sustainability for many businesses, especially small to mid-sized enterprises (SMEs). While explanations for delays may vary, their effects can be irreversible.

When the fate of your business is largely in the hands of those who make late payments, you need to know what resources are available to you.

The UK government has implemented legislation to help mitigate financial risks to businesses. These include;

1. Late Payment of Commercial Debts (Interest) Act 1998: The act establishes that if a business is late making a payment, the payee business can charge ‘statutory interest’, defined as 8 per cent plus the Bank of England base rate.
2. Late Payment of Commercial Debts Regulations 2013: These regulations impose payment period limits of 60 days for businesses and 30 days for public authorities.
3. Prompt Payment Code: This is a voluntary agreement managed by the Chartered Institute of Credit Management. The code of conduct standardises payment practices and ensures that each business within a supply chain has its invoice settled on time. By signing the code, businesses are expected to follow these practices:

• Pay within 30 days, with a maximum limit of 60 days, unless there are exceptional circumstances
• Give clear guidance on payment procedures, including complaints and disputes
• Encourage good payment practices within your industry

Businesses who sign the Prompt Payment Code have agreed to support an ethos of fair, quick payments.

The risks of late payments

If your business is forced to wait to receive a payment, it could be exposed to risks that restrict or even prevent growth. Late payments could lead to the following:

• The bank ‘bouncing’ cheques that you have written
• Redundancies
• Disruption to your supply chain
• A limit to the number of contracts you can accept
• Liquidation of your business

These are not the only potential risks of waiting to receive a payment, though they could be the most damaging.

How to deal with late payments

As a business owner, late payments have the potential to disrupt your entire business. Therefore, it is important you implement where possible, best practices to ensure you are paid on time:

• Verify potential clients have signed the Prompt Payment Code
• Establish client’s credit worthiness
• Agree payment terms from the beginning to avoid future disputes
• Understand the contract’s payment terms
• Ensure products and services are priced accurately
• Negotiate strict terms
• Include the government’s ‘statutory interest’ clause
• Take immediate action when payments become overdue
• Review your finances, ensuring that you know when payments should be coming in and when your expenses are due
• Remind clients 7 days in advance of a payment due date

Late payments are unfortunately common practice in many industries. But, by following these best practices, you can help protect your business from situations where you are left waiting for the cheque.

Source: Zywave Construction risk insights – Dealing with late payments

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