As the cost of living continues to increase, small businesses are being forced to deal with the consequences. One such consequence is an increase in late payments.
According to a recent study, small businesses are now being hit with more late payments as a result of the rising costs. This can have a serious impact on credit control and credit management efforts.
If you're a small business owner, it's important to be aware of this trend and take steps to protect your business.
What is the scale of the problem?
According to research by Barclays, 26 per cent of businesses report that late payments have become more common in the past 12 months. This is up from 18 per cent in 2017.
The study also found that the average value of late payments has increased by over the same period, rising to £62,000. This is a significant amount of money for small businesses to lose out on.
This means that small businesses are increasingly having to bear the brunt of late payments.
What is the impact of late payments on small businesses?
The late payment of invoices can have a serious impact on small businesses. It can cause cash flow problems and make it difficult to meet other financial obligations. This can ultimately lead to business failure.
According to the Federation of Small Businesses, late payments are one of the biggest problems facing small businesses. They estimate that late payments cost small businesses £50 billion.
There are a number of things that small businesses can do to try and reduce the impact of late payments. This includes credit control measures such as sending reminders and using credit management software. However, it is often difficult for small businesses to recover late payments.
The cost of living is increasing at a faster rate than wages, which is putting pressure on household budgets. This means that people are less likely to have money available to pay their bills on time.
Late payments are a major problem for small businesses, and the cost of living increases are making it worse. This is putting many businesses under strain and could lead to more businesses failing.
Some of the most common issues stemming from late payments include:
- Difficulty meeting financial obligations - When businesses don't receive payments on time, they may struggle to meet their financial obligations, such as rent or loan repayments. This can put them at risk of defaulting on their loans and losing their business premises.
- Increased credit risks - When businesses are consistently paid late, they may be seen as a higher credit risk by lenders. This can make it more difficult and expensive for them to access credit in the future.
- Reduced cash flow - Late payments can reduce a business's cash flow, making it difficult to cover day-to-day expenses or invest in growth. This can eventually lead to the business becoming insolvent.
- Increased borrowing costs - If a business has to borrow money to cover the cost of late payments, they will incur additional interest and fees. This can put even more pressure on their finances.
- Damage to credit rating - Late payments can damage a business's credit rating, making it harder for them to get credit in the future. This can limit their ability to grow and invest in their business.
What is being done to resolve the situation?
In order to resolve the situation, the government has taken steps to strengthen the Prompt Payment Code. The Code is a voluntary code of conduct that encourages businesses to pay their suppliers on time.
However, the Prompt Payment Code is voluntary, and businesses are not legally required to sign up for it. This means that many businesses are still not paying their suppliers on time.
The government has also introduced new legislation that will require large businesses to report on their payment practices. This will help to shine a light on late payment practices and put pressure on businesses to change their ways.
Improving transparency will help to give small businesses the information they need to make informed decisions about who they do business with.
What can businesses do to resolve the situation themselves?
Thankfully, there are a number of steps that businesses can take to improve their credit management and make sure that they are paid on time.
An effective credit control policy
A credit control policy is a set of procedures that businesses put in place to make sure that they are paid on time. Having a credit control policy in place will help to ensure that invoices are sent out promptly and that customers are chased for payment in a timely manner.
There are a number of different credit control policies that businesses can put in place, but some of the most effective include:
- Setting clear payment terms: Make sure that your payment terms are clear and concise, and that your customers are aware of them.
- Sending out invoices promptly: Send out your invoices as soon as the goods or services have been delivered, so that your customers can make payment in a timely manner.
- Chasing payments: If payments are not received within the agreed timeframe, make sure to chase them up promptly. This can be done via email, phone or even letter.
By having an effective credit control policy in place, you can help to ensure that your business is getting paid on time and avoid any potential financial problems further down the line.
A credit control policy should:
- Set out clear payment terms and conditions
- Include regular credit checks on new and existing customers
- Send reminders before the payment is due
- Follow up on late payments promptly
Make use of automation
Automation can help to make the credit control process more efficient and take some of the manual work out of it.
Chasing payments has an associated cost, as well as opportunity costs in terms of the time spent by credit control staff. Automation can help to reduce these costs.
There are a number of credit control software solutions available on the market, which can automate many of the tasks involved in credit control, such as sending reminders and following up on late payments.
Credit control is an important aspect of credit management, and it helps to keep accounts receivables updated. By automating credit control processes, businesses can improve efficiency and save on time and money.
Review credit policies
If your company offers credit to customers, it’s important to have credit policies in place. These credit policies should be reviewed on a regular basis, and updated as needed.
Credit policies should include:
- The credit terms that your company offers
- The credit limit for each customer
- How often credit checks will be performed
- What action will be taken if a customer exceeds their credit limit
Enforcing credit policies can help to reduce the risk of bad debt, and improve cash flow. By automating the process of credit control, businesses can ensure that their credit policies are being followed, and that accounts receivables are kept up to date.
Implement late payment penalties
Late payment penalties can act as a deterrent for customers who are slow to pay their invoices. Charging interest on late payments can also help to offset the cost of carrying receivables.
As per UK law, businesses are able to charge 'statutory interest' on late payments at a rate of 8% plus the Bank of England base rate for business-to-business transactions.
Offer early payment discounts
Early payment discounts can encourage customers to pay their invoices promptly. This can help to improve cash flow, and reduce the amount of time that receivables are outstanding.
Discounts can take the form of a reduction in the overall price of the goods or services purchased, or a rebate on the amount owed.
Conducting credit checks on new customers
Credit checking new customers can help to minimise the risk of bad debts and late payments.
There are a number of credit checking agencies in the UK, such as Experian and Equifax, that can provide businesses with information on an individual or company's credit history.
This can give you an indication of whether they have missed payments in the past, or have a history of defaulting on debt repayments.
How Chaser can help
Chaser's automated credit control software can help you to get paid on time, every time.
Our software includes features such as automatic chasing of overdue invoices and credit checks on new customers.
We also offer a range of helpful guides and resources on credit management, accounts receivables and credit control.
If you're struggling to get paid on time, or want to avoid late payments in the future, why not give Chaser a try? Contact us today to find out more.
