How businesses can manage late payments

In conversation with Yvonne Gale, Chief Executive of NEL Fund Managers Limited and Business Growth Board member at the North East LEP, about how businesses can manage late payments

Why is the issue of late payments such a problem for businesses, particularly SMEs?

For any business, having reliable cashflow can make such a difference. Money being paid into the bank on the day it’s expected is the norm for people in a job, but it can be a continual problem for business owners and their finance people.

If money arrives late, there are consequences as to whether outgoings can be met that week. Then there’s the cost of having to have a contingency, such as a finance line, so you can cope if payment arrives late. Having to borrow just to meet normal cash fluctuations means your ability to borrow to adapt or grow has been eaten into. In an ideal world, all borrowing should be for positive reasons, not because someone else hasn’t paid on time. In extreme situations, businesses can fail due to late payment.

SMEs are often at the end of a supply chain so if everyone pays late, the SME gets paid last. Many don’t have access to professionals that can help with the problem, or they’re just not big enough businesses to cope.

When is a payment considered to be late? Does it vary business to business?

Lateness is a contractual matter. It all depends on what your contract with your customer says.

The number of days late is determined by the number of days beyond the contractually agreement payment terms. This means every individual sale might be different. There are norms on contracts by sector and by business.

It’s the individual SMEs’ decision what to agree in the contract. However, dealing with larger businesses the contract terms are often set by the large company on a ‘take it or leave it basis’, so you might need other steps to prevent problems.

What can businesses do to prevent or limit late payments?

There’s a lot that can be done. Prevention is better than cure so all terms and conditions and contracts should be read, no matter how small the fine print is or how complex the language. On your terms and conditions, and if signing major contracts, consider getting legal advice so you know what is being agreed to.

A common problem is the need for the right reference numbers. Ask if any purchase order number, contract number, supplier number etc. needs to be quoted on your invoices so they don’t get lost. It can also be useful to follow-up sizeable invoices with a call to check they have arrived and are in the approval system.

Having an accounting system that you keep up to date is the key to knowing when an invoice is due so you can be on the ball and be straight on the phone if a payment doesn’t arrive on time. Today, there are easy to use cloud-based accounting systems that mean you can update and check them, even from your mobile.

Credit checks are a good idea as it’s your choice who you extend credit to. Companies who pride themselves on their prompt payment to SMEs are signatories to the Prompt Payment Code. NEL Fund Managers have been a proud signatory for several years.

If something goes wrong, customers with a good credit rating or signatories to the Prompt Payment Code will have processes to sort it out, meaning they are more reliable payers than those without these credentials.

Forming a relationship with several people within the company you’re working with can be a good idea in case there is a communications breakdown at their end, or the person who looks after your payments is on holiday or ill. Chat to people and understand how they work so if there’s a problem, you know who can fix it. If you are a small business, say so, because they might have faster payment terms for small businesses suppliers.

What support is available for businesses struggling to resolve the issue themselves?

The North East has plenty of legal firms who can both advise and take action to defend your position. Seeking a county court judgment is designed to be a cheap and easy to access process to help small businesses.

The Office of the Small Business Commissioner is a government body appointed to help SMEs dealing with large corporates. It can provide guidance on how to prevent many problems, and will step in on your behalf if you need help with late payment.

Membership of several business organisations in the North East also includes legal support, either for free, or at discounted rates.

Yvonne Gale is Chief Executive of NEL Fund Managers Limited and a Business Growth Board member at the North East LEP.