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Late payments: how should SMEs deal with them?

18 March 2020: with the coronavirus outbreak coming hot on the heels of Brexit and flooding, it is more vital than ever for businesses to put measures in place to deal with the consequences of late payments.

Maria Byrnes speaks to Paula Lovitt, Head of Small Business Payments Policy at BEIS, about how businesses can minimise the risk of late payments, and what to do in the event of being paid late. 
 
This month saw the administration of the Prompt Payment Code moved from the Chartered Institute of Credit Management (CICM) to the office of the Small Business Commissioner (SBC). This was in response to the Government’s ‘Creating a Responsible Payment Culture’ Call for Evidence in 2019. The aim is to bring all late payment initiatives under a single umbrella. 
 
The Code’s purpose is to promote a culture of prompt payment. Its 2,500 signatories have committed to paying 95% of invoices within 60 days and work towards 30 days as normal practice. A number of businesses that have failed to honour those commitments in the last 12 months have been removed, and only reinstated when a suitable remedial plan has been approved by the PPC’s Compliance Board.
 
Not all late payment is intentional. So how can bigger business, in particular, avoid falling foul of the prompt payment code? Paula, who moved into policy 12 years ago, notes that it comes down to good practice and dealing with invoice queries promptly. Larger businesses might have an account manager to deal with invoicing questions, but that’s not always the case. Those conversations are vital – at the start of a contract – not once it is underway. 
 
But she also recommends that boards should address late payment practices. The goal is to “make it a bad thing to be a bad payer”, she says, in the same way that we talk about it being bad to be a polluting company. “If you’ve got an issue with an invoice that is from an SME, it’s no less important than one between bigger clients; there should be a process for everybody, and it should be transparent.”
 
However, Paula also comments that late payments aren’t solely an issue between larger and small businesses. According to figures released in November 2019 by Pay.UK, which runs the Bacs Direct Credit and Direct Debit payment services, 8 out of 10 private sector late payments are owed to SMEs by other SMEs. 
 
Paula has been in her current role as Head of Small Business Payments Policy since November 2018 and is passionate about the subject. She explains that she particularly enjoys the fact that it deals with real-life issues: “It’s tangible and you feel like you’re making a difference […] as the things you’re doing actually make an impact.” With the UK’s SME community comprising 90% of all businesses, the potential for change is great. 
 
She makes a series of recommendations for what measures SMEs can put in place to help avoid late payments as well as how to deal with them. These are as follows.

Adopt technology and plan ahead

Paula argues that late payments can often be related to “disorganisation”. She says it is important to have “good hygiene” in relation to cash flow. She recommends SMEs adopt technology to issue and send invoices – this could also increase productivity and free up resources. 
 
It’s also worth considering credit insurance. After all, “you wouldn’t go on holiday to America without holiday health insurance. And you might say it looks a little bit pricey but the consequences of not having it could be catastrophic,” she says.

Agree your terms of contract in advance

It is also vital for businesses to be clear at the point of contracting about both parties’ terms. You are more likely to run into issues if you haven’t agreed the terms in advance, she says. The default position when a dispute arises is 30 days if you haven’t agreed terms upfront. In case of a late payment dispute, a small business can contact the SBC office. It provides guidance on its website, including your options and next steps.

Communicate openly and quickly to solve issues

Speak to your bank and/or financier as quickly as possibly as “the longer you wait, the less options are available to you” and the more likely you are to put your credit at risk. Be honest and relay all the facts. According to Paula, the longer you leave it, the higher the risk of being considered a financial liability. After all, “access to finance is the solution to the late payment issues”.
 
If late payments affect your ability to pay your suppliers, speak to them as soon as possible too as there will most likely be much more understanding if you explain that you have a payment issue than if you do nothing.

What help is available? 

 While there isn’t a “one size fits all” solution, CICM, for example, provides over 15 cash flow management guides, from invoicing to how to chase late payments and what to do if all else fails. Accountants can also help their clients by making them aware of the guidance that is available. Don’t forget you can charge interest on late payments without reissuing an invoice. Paula reminds us that you can even issue a second, separate invoice for the interest you’re owed. That could be the ultimate deterrent. Then there is supply chain finance. SMEs should not dismiss this. “One of the problems is that SMEs don’t always know what they are looking for,” she says, even though some good schemes are available. 

The Government also publishes  its Payment Practice Reporting data, which is. publicly available through gov.uk. It allows anyone to search for any large company to find out their payment performance and discover their payment record. The data is then also used to monitor large businesses performance against the Prompt Payment Code. 
 
Even though late payment is an issue that may never be eradicated, Paula advises against legislating for 30 days terms. For starters, there are some sectoral difference that would make this difficult in practice. And it goes against freedom of contract conventions.
 
With the news focusing heavily on the outbreak of the Coronavirus (Covid-19), as well as Brexit and flooding, Paula is clear that it is down to businesses to take action. There are many options to try; resting on laurels is never one of them.
 
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