Last editedApr 20234 min read
30% of payments to small businesses are made late, well beyond the usual 30-day invoice terms, according to recent research by the Federation of Small Businesses. And it’s large corporate-level businesses that are most at fault when it comes to slow payment of their smaller business suppliers.
There’s a culture of slow payment at corporate boardroom level, which is bad news for small and medium-sized enterprises (SMEs) that rely heavily on prompt payment of invoices to meet their running costs and stay in a positive cash-flow position.
To remedy this problem, and bring payment times back into line, the Government has brought in the new ‘Duty to report on payment practices and performance’ legislation, making it compulsory for the UK’s large businesses and partnerships to report twice yearly on their payment performance.
We’ve already highlighted how your firm can help bigger corporate clients to meet these new reporting requirements. In this second part, we’ll outline how you can work with small suppliers to get proactive with their late-payment remedies.
It’s a great chance to help your SME clients improve payment collection, embrace new payment technology and get paid faster and more reliably.
The impact of the ‘Duty to Report’ legislation for SMEs
Late payment owed to UK SMEs was reported as £26.8 billion as of June 2015. That debt is holding back British enterprises from fulfilling their true potential.
The primary aim of the ‘duty to report’ legislation is to reduce this late-payment debt and make larger businesses accountable for paying suppliers on time. With access to these public reports, owner-managers and management teams of SMEs get a level of insight that hasn’t previously been available to them.
Payment performance reporting will give SMEs:
Greater visibility of average payment times – SMEs will know the average payment times for corporate businesses, giving them the ability to grade corporate customers and have more honest payment conversations.
Better vetting of potential customers – with payment performance data available online in the public domain, SMEs can vet their prospective customers and decide if they’re likely to be a boost to revenues, or a drain on cash flow.
Improved decision-making – armed with all this new information, small suppliers can enter intro new contracts with greater confidence of getting paid on time, and with the ammunition needed to negotiate any payment disputes.
How to reduce late payment of invoices for SME clients
With SME clients, your role is to help them capitalise on the Government’s late-payment incentive – and you do this by working with these businesses to reduce aged debts, improve payment channels and guarantee their large clients settle bills on time.
Unlike big corporate clients, SMEs tend to be more flexible in the ways they operate. So any changes to systems, processes or practices can be made in a timely way – making it easier to implement your ideas for reducing their debts and cash-flow issues.
These are just a few ways you can improve payment times for your SMEs clients:
Set clear and unambiguous payment terms – one key factor behind late payment is a lack of any formal agreement on payment terms. Work with SMEs to formalise payment expectations and ensure these are included in their terms and conditions. At the start of any contract, make sure SMEs share these terms with the customer and get signed acceptance of the expected payment dates.
Get paid up front – when SME clients are negotiating long-term contracts with big corporates, advise them to agree on a first payment up front, and break down further payments into clear instalments, paid when agreed milestones are met – when products are delivered, services received or projects are completed etc.
Improve accounting systems and overview of debt – moving SME clients to cloud-based accounting helps you bring them a better way of managing their finances. As well as giving SMEs instant, mobile access to their accounts, solutions like Futrli, Fathom and Spotlight Reporting bring clients real-time reporting on aged debts, late-paying customers and overall cash-flow position – keeping them in full control of their outstanding payments and debtors.
Move clients to online invoicing – switching SMEs to a cloud system also lets you introduce online invoicing to their business. The need for paper invoices and slow postal delivery is removed and invoices can be emailed straight to the corporate customer’s finance team, getting the SME paid faster.
Embrace new payment technology and Direct Debit – online payment gateways speed up cash collection by making it easier to pay. With a solution such as GoCardless, the large business customer sets up a mandate that means invoices are automatically paid on their due date. That means there’s no risk of the customer paying late and no chasing required from the SME. Direct Debit can be used for both regular payments and one-off payments, so it’s a payment option that suits all the SME’s business needs.
Make Direct Debit payment a contractual commitment – if SME clients have business customers that are willing to embrace Direct Debit, make this payment preference part of the payment terms and conditions in their contracts. This may not be possible for some very large corporate clients, but the more customers you help move to Direct Debit, the easier payment collection becomes – both for the SME and their customers.
Automate your invoice chasing – if the SME’s customers aren’t open to online payment options, some of the hassle of chasing up traditional payment can be removed using automation. Apps like Chaser, Satago and Debtor Daddy allow SMEs to automate the process of chasing up late-paying clients, sending out chaser emails as soon as bills become overdue – saving time, reducing debtor days and improving their cash-flow situation.
Helping SME clients get paid more effectively
With such a clear focus from government on reducing the UK’s late-payment problems, it’s time for your firm to become the adviser of choice for SMEs looking to cut their mounting aged debts and get paid on time.
By implementing the latest in payment technology, and combining it with your own financial expertise, you have the systems, solutions and automation tools to kick your clients’ payment collection processes into shape.
Talk to your SME clients today and find out how you can capitalise on the ‘Duty to Report’ legislation and reduce the negative impact of late payments for small suppliers.
Find out more about how using Direct Debit via GoCardless speeds up client’s payment processes.