Keep cashflow positive and protected

The late payment culture that exists between businesses can have a big impact on your company.

• A third of payments to small businesses are late.

• The average value of each payment is £6,142.

• 20% of small businesses have run in to cash flow problems due to late payments.

• If small businesses were paid on time, this could boost the economy by an estimated £2.5 billion annually.

So how can you reduce the chances of this affecting you?

At first glance it might not seem like something you can control. But there are some things you can do.

• Carry out due diligence when receiving an order from either a new or existing customer. This means checking:

  • their credit rating (search for online tools)

  • the Companies House number against the purchase order

  • who is placing the order

  • who to contact about payment and their contact details.

• Consider pro forma sales. This means sending your invoice before you deliver your goods or services to a customer for first orders. This is normal business practice. New customers need to build up a credit rating with you.

• Agree payment terms when you take the order. Always state the payment due date clearly.

• Send invoices and statements promptly. Making sure these are raised on time helps you manage your cash flow.

• Provide regular statements and keep in touch with your customers.

• Remember: a sale does not count until it's been paid for.

• Don’t be afraid to withhold goods or services in lieu of outstanding payment.

• Understand your customer. Look out for any payment requirements. These are common in public sector contracts.

• Consider using invoicing software to keep on top of your invoicing. Platforms such as Xero will help you stay organised. They'll also free up your time to run your business.

Charge interest on the late payment

You can claim interest and debt recovery costs if another business is late paying for goods or a service. This is called ‘statutory interest’, which is 8% plus the Bank of England base rate for business-to-business transactions. You can’t claim statutory interest if there’s a different rate of interest in a contract.

You can also charge a business a fixed sum for the cost of recovering a late commercial payment. This is on top of charging interest. The amount you’re allowed to charge depends on the amount of debt. You can only charge the business once for each payment.

Draft a new invoice providing the new total amount due. This will be the original amount plus interest and compensation. Send this with an accompanying letter explaining that you weren't paid as per the agreed credit terms. You're exercising your legal entitlement in doing so. Use this calculator to work out the interest and recovery charge.

Use mediation

A professional mediator, agreed on by both of you and your debtor, can help you to work out a solution. You can do this before taking other action, or you can pause any legal action you’re taking to mediate. You can choose when, where and how mediation happens.

• England and Wales – use the Ministry of Justice online directory

• Northern Ireland – use the Law Society of Northern Ireland

• Scotland – use the Scottish Mediation Register

Make a complaint

You should always try to resolve the payment issue directly with your customer first. You should do this as early as possible, and definitely within 12 months of the payment being due. If you’ve not been able to resolve things, the Office of the Small Business Commissioner (OSBC) might be able to help.

This is an independent public body set up by the government to tackle late payment in the private sector. The OSBC covers the whole of the UK.