Handling late payers

What do you do when a debtor fails to pay their invoice on time?

Handling late payers

Businesses live in dread of late payment and with good reason. Two-thirds of invoices in the UK are paid late, according to research by MarketInvoice, with SMEs particularly vulnerable. They’re also the most likely to be damaged by unpaid bills, with cash flow and productivity suffering. Some even go under due to unpaid invoices. And there’s evidence that late payments are on the increase, with some industries being notably worse than others.

  • Businesses operating in the transport sector are the worst offenders, being an average of 25 days late paying, MarketInvoice data shows.

  • The utilities industry takes an average of 23 days extra to settle its bills.

  • Media firms are an average of 21 days overdue paying invoices, while management consultants take 20 days more than requested to pay up.

  • Tech companies are an average of 19 days late, compared with the 18 days extra both financial services and energy businesses take to pay their debts.

  • Construction businesses are an average of 17 days late paying invoices.

  • Supermarket and retail firms are 14 days late paying on average, while wholesalers and food and beverage businesses pay up 13 days late on average.

Escalating action against late payers

Given late payment is evidently so ubiquitous, what can companies do to encourage sluggish payers to hand over the money? Most firms start gently by sending a friendly reminder by email to jog the accounts department into action. If this fails, a call to the bookkeeper or accounts payable team may be necessary. Next come formal written demands. These typically escalate from a polite request for payment followed by a firm reminder. If such efforts yield no meaningful response, it may be time to send a final notice warning that the next step is to charge statutory interest on the amount owed as per the Late Payment of Commercial Debts Act. Alternatively, you may have set out a late payment interest rate in your original payment terms, which you could now threaten to apply.

It’s understandable that many businesses are reluctant to take this final action for fear of antagonising a customer. Just one in five smaller firms has tried to apply late payment interest on an unpaid invoice, Zurich Insurance research shows. But given the real threat of losing your business if invoices go unpaid, action is sensible.

The last resort is passing over the bill to a debt collection agency or getting solicitors involved to chase payment. The Government also has a Money Claim Online service for sole traders or small businesses owed less than £100,000. This involves filling out a small claims court form online, which will prompt a court letter to the customer demanding prompt payment and threatening a County Court Judgement for failure to settle the invoice.

Late Payment of Commercial Debts Act

If a business is left out of pocket by a commercial customer, the law can help. The Late Payment of Commercial Debts Act states that a company can charge statutory interest of 8% plus the Bank of England base rate for business-to-business transactions. However, if a contract already outlines a different agreed rate of interest, this calculation will not apply. To charge interest under the Act, it’s necessary for the business to issue a new invoice stating the new sum owed, including the interest sum.

Ways to avoid late payment

Of course, prevention is better than cure and taking measures to avoid being paid late is essential to good business:

  • Run credit checks on new customers of any size or, at the very least, ask around about their reputation. And always trust your gut. If you don’t have a good feeling about a customer, don’t deal with them.

  • Make sure your payment terms are clear and easy to read on the invoice. Include details of late payment interest charges, too.

  • Send out the payment demand as soon as the work is finished. A follow-up call or email to check the invoice has been received and is in order doesn’t go amiss either. In fact, maintaining a friendly relationship with whoever handles payments at the other end is always worthwhile to smooth out problems when and if they arise.

  • Consider whether it’s possible to ask for all or some of the money owed up front.

  • Set up payment reminders and alerts so that you’re immediately aware if a debt has gone over its due date.

  • Think about automating payments where possible to avoid the hassle of chasing invoices altogether. Payment providers such as GoCardless can do all the hard work for you, taking regular payments or one-off amounts quickly and at minimal cost.

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