Tackling the Challenge of Late Payments: Tips for Businesses

Late payments are a common occurrence in the business world, affecting cash flow, relationships, and ultimately, the survival of a company.

This issue is particularly pronounced in the UK, where small and medium-sized enterprises (SMEs) often find themselves at the short end of the stick, wrestling with the ramifications of delayed payments from their clients.

In fact, data from 2023 shows that two million of Britain’s small businesses fall victim to late payments with over a quarter (27%) of UK SMEs admitting to being owed between £5,000 and £20,000 in unpaid invoices.

Xero’s data shows late payment hit a two-year high in September 2022 when payments to small businesses were made on average 8.2 days late, significantly later than they are in Australia (6.5 days) and New Zealand (6.2 days), and thus addressing this issue is paramount.

This blog post discusses the challenge of late payments, offering unique insights and practical tips to help you navigate and mitigate this pervasive problem.

Understanding the Impact

Late payments are a significant concern for businesses particularly affecting cash flow, operational efficiency, and relationships with suppliers and clients.

This challenge is especially acute for SMEs, which often operate with tighter cash flow margins as well as account for 99.5% of all private-sector businesses and 61% of all employment.

This is because the delay in receiving payments can hinder their ability to manage day-to-day operations, invest in growth opportunities, and fulfill their financial obligations on time.

During COVID-19 and the ensuing recession, 40% of UK businesses saw worsening late payments with 3 in 5 businesses owed money from late payments, fueling stress and cash flow problems. Meanwhile, the number of insolvencies doubled.

Legislative Framework

Recognising the challenges posed by late payments, governments and industry bodies have introduced various measures and guidelines to encourage timely payments.

In the UK, initiatives such as the Prompt Payment Code aim to foster a culture of prompt payment, including commitments from signatories to pay suppliers on time. Additionally, legislation requires larger companies to report their payment practices, enhancing transparency and accountability.

While these steps are positive, they represent ongoing efforts to address the complexities of late payments in the business ecosystem.

Practical Tips for Mitigating Late Payments

When it comes to tackling the problem of unpaid invoices, there are several things you can do. Let’s take a look at some of the most common ways to handle late payments:

1. Clear Payment Terms

It's crucial for businesses to set and communicate clear payment terms upfront. This strategy helps establish expectations and can reduce misunderstandings that lead to delayed payments. By specifying deadlines, accepted payment methods, and potential late fees from the beginning, businesses can create a framework that encourages timely payments.

2. Invoice Promptly and Accurately

Efficiency in invoicing is key to minimizing payment delays. Ensuring that invoices are accurate, comprehensive, and sent out promptly after goods or services are delivered can help expedite the payment process. Digital invoicing systems can be particularly effective in streamlining this aspect, offering the added benefits of tracking and automation.

3. Establish a Follow-up System

A systematic approach to following up on outstanding invoices can also play a vital role in managing late payments.

Regular, polite reminders leading up to the payment deadline, followed by immediate follow-up if payment is not received, can keep the issue at the forefront of your clients' minds without straining the relationship.

Businesses that follow up with 90% or more of their invoices have a better chance of getting paid within a week of their invoice due date.

4. Know Your Customer

Before entering into new business agreements, conducting due diligence on potential clients' payment histories and financial stability can be invaluable. This insight allows businesses to make informed decisions about credit terms and may influence strategies for managing risk associated with late payments.

5. Leverage Technology

Technology offers powerful tools for managing and tracking payments. Automated invoicing and reminders can alleviate some of the administrative burdens, while online payment solutions can make it easier and faster for clients to pay.

Integrating such technologies into your business practices can significantly impact your ability to manage cash flow effectively.

Related Read: 6 Ways Xero Accounting Software Can Help Your Business

6. Negotiate Payment Plans

When faced with unavoidable delays, being open to negotiating payment plans can help maintain positive client relationships while ensuring continuous cash flow. This flexible approach can be beneficial for both parties, allowing businesses to receive payments in a manner that accommodates their clients' financial situations.

7. Seek Professional Advice

For businesses facing chronic late payments, professional advice can provide a roadmap for navigating these challenges.

Legal advisors can offer guidance on contractual rights and possible recourse, including formal demand letters or, in extreme cases, legal action. For instance, you could consider implementing interest charges on overdue invoices, which can be set at 8% above the Bank of England's base rate for business-to-business transactions.

Consulting with financial advisors can also provide strategies for cash flow management under tight conditions.

The Final Word

From April 2024, companies must demonstrate they pay invoices within an average of 55 days to qualify for government contracts, as announced in the 2023 Autumn Statement. This requirement will tighten to 45 days in April 2025 and 30 days in the following years.

While late payments remain a challenge in the business landscape, adopting proactive strategies can help mitigate their impact.

By establishing clear payment terms, leveraging technology, and maintaining open communication with clients, businesses can improve their payment processes and enhance their financial stability.

At Sanay, we can help cut out late payments with a combination of clear policies, effective practices, and, when necessary, adaptive measures to address specific challenges as they arise. Our comprehensive approach will help you navigate the complexities of late payments, support sustained growth, and bring you success in the competitive market.

Reach out to us today.