How Small Businesses Should Tackle Late Payments

The failure of thousands of small businesses every year is blamed on late payment issues. Nationwide, the bill for unpaid invoices is estimated to run into billions.

The recent economic crisis and political uncertainty brought about by the pandemic and Brexit is ultimately making credit control problems even more unpredictable for small businesses.

Late payments are a persistent problem. Despite the existence of legislation designed to protect SMEs, many business owners still feel powerless when it comes to tackling late payments, particularly from larger corporations.

In this article, we examine the best way for small businesses to tackle late payments, and discuss how your company can establish an effective credit control system for the future.

The Traditional Approach to Late Payments

Traditionally, small businesses have found themselves at the mercy of larger companies and corporations that have an unimpressive habit of paying late. Large companies pay their suppliers and service providers as late as possible, in order to maintain their own cash flow. Unfortunately this has an all-too-predictable knock-on effect on the small business owed, which also needs that money for their cash flow.

The larger company is in a better position financially to hold off on payment, but for small businesses late payments can be disastrous. Money may need to be borrowed to cover their outgoings and expenses, and to pay their suppliers and staff. Continued late payments can quickly escalate, leaving a small business facing insolvency and eventually liquidation.

Part of the problem is that small businesses are afraid to risk their relationships with larger companies. While legal frameworks exist to help SMEs claim their money, many business owners simply don’t want to jeopardise their future deals, which can put their cash flow in a perilous position in the short term.

As licensed insolvency practitioner and business adviser, Gerald Irwin of Irwin Insolvency states: “This way of thinking may work when times are good but a different approach is needed now that the economy is still unpredictable”.

Other problems faced by SMEs include inadequate credit checks, poor credit control procedures, or simply a lack of experience and knowledge in dealing with larger companies. Small companies that aren’t sure where they stand when their invoices go unpaid need to seek out expert, impartial advice and evolve their systems to better tackle late payments in the future.

Effective Ways to Tackle Late Payments

Should businesses put up with late payments from large companies? No. As Gerald Irwin says:

“Late payment should never be tolerated and can be tackled head-on with the introduction of an effective credit control system. Too many businesses are paying late to sustain their own cash flow and undermining their suppliers in the process and there is a need to get tough on this practice which should include credit checks on new and existing customers, offering incentives for prompt payment and making customers aware of their obligation to pay invoices within the agreed period”.

As Mr Irwin states, there are several ways that SMEs can avoid the traditional method of tackling late payments (simply waiting for large companies to pay what they owe), and take control of payments themselves.

There are several effective methods that small businesses can employ in order to not only get paid but to build robust credit control systems to ensure late payments are no longer the norm.

Here are the best approaches, including many simple changes that your business can begin to implement today.

Digitalise and Simplify Accounts and Invoices

It’s the digital age, and digitalised accounts and invoices are not only the future but are incredibly efficient. Rather than having a complex paper trail of folders and filing cabinets, use cloud-based software to make your accounting system simple and easily accessible.

Digitalised accounts make it easier to send invoices and keep track of money that hasn’t yet been paid. Stopping late payments starts with your credit control procedures – if you don’t know who owes you what, you’ll never know when to chase payments. Track every invoice, and as soon as it hits the late payment date it’s time to start chasing.

Offer Multiple Payment Options

As a small business, you’re often much more flexible than a larger company. Large corporations don’t have much control over the way they accept payments, process accounts and pay invoices.

As a small business, you can make things easier by offering the company different payment options. For instance, you may traditionally use cheques to send and receive payments, but the company might be able to process an invoice quicker if they are able to pay directly into a bank account.

In the digital age, there are multiple avenues available for payment, as well as traditional banks accounts. There are online payment services, borderless banks, and more.

Credit Check All Customers

There’s a reason why banks and large businesses carry out credit checks on their customers before offering finance: it limits risk. There’s no reason why SMEs shouldn’t also be carrying out credit checks on existing and new customers before offering credit.

Credit checks can easily be carried out online, while it’s good practice for a small business to enquire further into a new company’s previous dealings with small businesses. A quick Google search may reveal a string of complaints or news articles that raise red flags.

Offer Incentives for Early Payment

While small businesses shouldn’t have to incentivise large companies to pay on time (this should be the norm), they can offer incentives for companies to pay early.

A major problem for small businesses is the cost of recovering debts. Chasing a late payment can end up costing more in legal fees than it’s worth, while SMEs can be left with added costs if they are forced to take out loans or credit to cover gaps in their cash flow due to late payments.

Offering a reduction if payments are made early or providing discounts for cash payments rather than taking out credit can help to incentivise a positive cash flow.

Contact Irwin Insolvency Today for Your Free Consultation

With decades of experience offering small businesses advice on how to chase late payments, our licensed insolvency practitioners can offer impartial advice that can help your business to establish stringent payment processes for the future.

If your business is struggling to tackle late payments, then don’t hesitate to contact Irwin Insolvency for your free, no-obligation consultation.

Contact Irwin Insolvency today for your free consultation

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0800 009 3173

About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.