Start-ups urged to consider the problem of late payment

The culture of late payment is effecting and even threatening the survival of many UK businesses.  Having to wait beyond terms for payment is damaging the integrity of UK industries and undermining the future prospects of small businesses. Late payment creates a chain reaction that reaches businesses in all sectors and of all sizes.

Start-ups need to think carefully about late payment!

If you are in the process of, or even thinking about starting up a new business, the problem of late payment will be the last thing on your mind. You will be working on your business plan, arranging finance, finding suppliers and worrying about the competition. Almost no one starting a new business factors in late payment and the problems that follow, within months you could be waiting to be paid £1,000’s while your bank balance is zero and the rent and VAT has to be paid by the end of the month.

This is the reality of doing business in the UK in 2015, the life of the economy is being squeezed out by late payment. However, there are signs that the problem is starting to be addressed at Government level, with new proposals designed to protect and help small and start-up businesses.

Just how serious is the late payment problem?

If you are concerned about starting a new business because of the problems associated with late payment and its effect on cash flow, or if you are an existing business experiencing problems with late payment, you are far from alone. Official figures show just how serious and widespread the problem really is:

  • 75% of payments received by small businesses are at least 30 days beyond agreed terms
  • The true cost of late payments equates to £678 per business per month
  • Businesses in the UK are currently owed over £32 billion in late payments
  • 20% of UK directors have been forced in to taking a pay cut help cover shortfalls

No cash flow – No business!

You can come up with the very best business ideas, you can sell thousands of products, your services can be in high demand, your customers can love what you do and tell you so, however, if your customers do not pay for the services and goods you supply on time, you do not have a business, you are simply funding your customers businesses!

Cash flow has always been and always will be king. Without it your venture, no matter how well perceived and planned is destined for failure. For start-up’s late payment is a true lose-lose scenario, many new businesses spend up to 15% of their working week chasing payment from customers, who they have often been only too pleased to accept orders from without checking either the customer’s financial status or their payment history. You can add a further 10% of your working week on dealing with overheads and suppliers who are demanding payment that you should be able to make, but cannot because you have not been paid by your customers.

How can you manage cash flow?

Most new businesses faced with the challenge of late payment take the usual routes of either introducing personal funds, arrange a bank overdraft or take out an invoice finance agreement with a factoring company.

If you have the funds available for working capital you are in a lucky position, as most start-up business owners simply do not. If you take up the option of an overdraft or factoring agreement you will be incurring substantial costs that you had not budgeted for and that will affect your bottom line.

There is another option, you could use late payment legislation to force your customers to pay you on time or penalise them if they do not pay you on time! Yes, this really is an option, the Government have designed and implemented legislation that will ensure your customers pay you on time or pay the costs you incur if they don’t pay you on time!

That’s great, why didn’t I know about this? Simple! Small businesses are discouraged from using the very same legislation that has been designed to help them, by the very same late paying companies that the legislation is aimed at!

What is being done to help?

A new code of practice is being implemented by the Government to encourage faster payment processing. The Code of Prompt Payment was first introduced in March 2015 asking company directors and business owners to pledge support by signing up to faster payment of invoices. Public sector bodies and agencies are also now duty bound to pay invoices no later than 30 days following issue. By 2016 large corporations will have to publish and declare payment information in their six monthly reports.

What about your new business?

The measures outlined above are undoubtedly a step in the right direction, but it will take quite some time for the effects to be felt by smaller businesses. There some things you can do to try and minimise the problems of late payment:

  • Due diligence should be implemented to assess the payment history and creditworthiness of customers
  • Set out payment terms clearly in your business terms and on invoices
  • Send payment request letters just before invoices become due
  • Do not be afraid to use statutory late payment law
  • Instruct a specialist in late payment recovery, such as Advocate