Deborah Kearns
For small business owners and self-employed workers, there is an instant feeling of relief when a client’s payment hits their bank account. But if you’re constantly chasing invoices, it can be a financial nightmare that could have a wide-ranging impact on your business.
There has been a 20% increase in companies reporting average payment times of more than 80 days for payments made between 1 March 2023 and 1 January 2024, according to research by Good Business Pays, which campaigns on behalf of suppliers. This means that businesses are wasting more time and energy hunting down late payments instead of focusing on their day-to-day operations and future growth.
Not getting paid on time and wondering how you’ll make your money stretch is enough to keep business owners awake at night, says Liz Barclay, the UK’s Small Business Commissioner at the Office of the Small Business Commissioner (OSBC), an independent public organisation that tackles unfavourable payment practices in the UK’s private business sector.
“It’s the uncertainty that really makes more businesses spooked,” Barclay says. “Because if you’re not certain [when you’ll be paid], then you can’t invest. You can’t upskill. You can’t do training. You can’t hire people. You can’t innovate or create jobs.”
The high cost of late payments
Late payments aren’t just an inconvenient thorn in business owners’ sides, they can take a significant time and financial toll, too.
A 2023 survey of business owners conducted by PayIt, NatWest’s open banking solutions provider, revealed about 27% of the UK’s SMEs said they were owed between £5,000 and £20,000 in unpaid invoices in 2023, while over half (55%) of SMEs said late payments increased in frequency over the year. A further 31% of businesses said they spent between 21 and 30 hours per month chasing past-due invoices.
A survey on behalf of NerdWallet in April 2023 found that 55% of businesses had outstanding invoices from the previous tax year, with 20% of unpaid invoices four to six months late.
How to initiate debt recovery
Barclay and Baston both say that pursuing legal action for late payments is usually a last resort, and many small business owners typically don’t have the appetite to take legal action against a larger business.
However, there is another way to take action. Through the Prompt Payment Code (PPC), small businesses may be able to claim late payment interest and compensation from businesses that have signed on to the code.
The PPC is a voluntary code of practice administered by the OSBC that lays out payment practices between companies of any size and their suppliers. Signatories to the code agree to pay 95% of invoices within 60 days and 95% of invoices from small businesses (with fewer than 50 employees) within 30 days.
And if chasing invoices on your own isn’t effective, ask for help, advises Baston. You can get free business support and advice from organisations such as the Small Business Commissioner, your local chamber of commerce or non-profit business support agencies.
“Reach out early,” Baston says. “Don’t let it build up, don’t let it get beyond you, because that’s where the stress and the strain become an issue.”
7 tips for protecting your small business from late payments
Before you’re faced with an arduous debt recovery process, here are a few tips to set yourself up for success when it comes to getting paid on time.
1. Know your financial runway. Evaluate your cash flow, expenses, assets and even your personal budget to sort out how long your business (and your household) could stay afloat if payments are delayed, says Craig Baston, COO of Colbea, a not-for-profit enterprise that supports businesses across Essex.
Understanding your financial picture will help you determine what payment terms to set up and if you have the flexibility to offer extended payment deadlines or need to request tighter repayment times.
2. Get everything in writing. Spell out clear payment terms, ideally in a written contract, Barclay recommends. Payments terms should include:
- payment deadlines (or project/payment milestones for larger projects)
- acceptable payment methods
- any late payment penalties or kill fees
- precise payment timing (i.e. within 30 days of receiving the invoice versus 30 days after the end of the month in which the invoice is sent)
3. Simplify your payment process. Offering clients a convenient online payment option (such as Stripe, Opayo and PayPal) or the ability to pay via electronic direct deposit into your bank account could help speed up the payment process.
Don’t forget to account for any credit card or payment processing fees, and add those to your invoice amount. However you prefer to be paid, ensure your invoices have all the necessary payment information included to take the guesswork out of it.
4. Automate your invoicing. Accounting software, such as QuickBooks, FreshBooks and Zoho, can send automated invoices on specific dates (for recurring services), help you track invoice payments and send automated late payment reminders to save you time and stay on top of frequent late payment offenders. And if you’re worried about the cost, some of these tools are available for free through business bank accounts.
5. Set reasonable late payment penalties. Your payment terms should spell out a late payment fee from the outset. While this is optional, Baston says including a late payment penalty in your contract can incentivise clients to pay you on time.
“It’s better to have it in there and not need it than not have it in there at all,” says Baston of late payment penalty clauses. “As long as you’ve put in a reasonable term, it’s probably useful to have it included because it can’t necessarily hurt the relationship.”
Tip: Charging interest on late payments is known as statutory interest, which is 8% plus the Bank of England base interest rate for business-to-business transactions. However, if you’ve already set a different interest charge for late payments in a contract, you cannot add statutory interest on top of it.
6. Build a good rapport with whoever pays the invoices. The person who hires your company and signs the contract may not be the same person responsible for invoice payments, especially in larger companies. Ask for that person’s contact details and connect with them from the start, ensuring they have all the information they need to pay your invoices, Barclay recommends.
7. Create clear boundaries. Prepare yourself for hard conversations if a client is perpetually behind on payments – even if it’s a client you’ve worked with for months or years, says Barclay.
“You also need to be brave enough to walk away and say, ‘No, I can’t afford to work with you,’” she adds.
Image source: Getty Images
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