A major problem for small businesses is late payments. While individuals usually pay on time, the business to business sector really suffers here. Those who supply goods or services to major companies frequently experience long delays in getting paid. Some have to resort to factoring, which incurs more expense for them. It seems that many larger organisations follow their own terms for payment, completely ignoring the terms on invoices they receive.
Results of Late Payment Receipts
It’s a vicious circle, because if you don’t get paid by your customers, you have problems paying your own suppliers. You can charge interest for late payments but most small businesses are reluctant to do so in case the customer decides to go elsewhere and they lose future business.
Late payments can cause serious problems for small businesses. Some may not even be able to pay their staff if their cash flow projections are nullified by not receiving expected income.
Sometimes accepting what appears to be lucrative business can make a small business vulnerable. For example, a provider of cross border deliveries from the UK to Europe has significant expenses in performing the service. The cost of fuel, ferry crossings and overnight stays can be crippling if the company has to wait 90 days or more for payment.
Your Legal Rights
Legislation to encourage prompt payment now includes an entitlement to reasonable compensation for debt recovery costs. The calculation of interest entitlement was simplified in 2002. It is now based on a reference rate, which is currently the Bank of England base rate as at 30th June, plus 8%. This means that the maximum that can be charged from the present to December 31st 2011 is 8.5% of the debt per year, so you just have to multiply that figure by the number of days the payment is late and then divide by 365. The bank’s base rate at December 31st will become the new reference rate for the next six months.
What to do About it
If you are concerned about this affecting your business, you need to review your credit control practices. Outsourced bookkeepers can help with this if you don’t have the time or the staff to cover it. If you don’t want to charge the statutory interest you’re entitled to, you could offer a discount for prompt payment, which might be a cheaper option than factoring or waiting for those late payers. Your outsourced bookkeepers might come up with other ideas too. Don’t forget to make full use of their experience and expertise.