Recent studies reveal that nearly a quarter of small and medium entrepreneurs in the UK are at risk of closing their doors because their clients do not pay them on time
Late payments are a problem.
If you're a small business owner in the UK, you understand this. Collecting payments was a problem before the pandemic was declared in March. Then businesses shut down, people stopped receiving paychecks, and clients stopped paying their bills.
When you attempt to collect payments, sending reminders, calling, emailing, texting, and doing whatever you need to do to remind people they need to pay their bills, you also run the risk of alienating customers. They ghost your calls, delete your emails, and generally avoid you as much as possible.
Small businesses are in trouble.
Keep reading to learn what you can do to collect on outstanding bills while still retaining your clients.
The problem of late payments
Delinquent payments to small businesses are causing a ripple effect. The UK economy is at risk. The UK had 5.8 million small businesses at the start of 2019 and that these small businesses account for 99.9 per cent of the business population in the UK.
Late payments affect the economy
We need small businesses to stay in businesses here so we can keep our economy afloat. The small businesses are the hub of the wheel in the economy and business world.
So when your small business is paid late or, worse yet, not at all, the entire country feels the ripple effect. You struggle to purchase inventory, make payroll, and pay your utilities. In the end, you have to close the shop because your clients do not pay their bills.
Not just a pandemic problem
The problem of late payments existed before the pandemic was declared in March 2020.
Globally this is a problem. Reports in South Africa, for example, claim that 50 per cent of small and medium businesses received late payments on invoices past the invoice due date in 2019.
In the UK, small business owners spend approximately 90 minutes every day chasing late invoice payments. That means business owners are spending almost a quarter of their business day trying to find those who owe them money rather than serving their current customers.
So businesses cannot continue to make money when they're tracking down late payments. They're not receiving funds for the service they do, and they're unable to spend time on their clients.
Worst of all, the problem of late payments would not go away if the pandemic problems were solved. If the WHO came out with a vaccine today and the coronavirus was eradicated like polio in the 1960s, small businesses in the UK would still have problems collecting on their bills. The problem existed before the coronavirus.
The pandemic effect
The COVID-19 global pandemic has only worsened the problem. Recent surveys estimate that nearly two-thirds of small businesses are receiving a big financial hit because of either late or frozen payments. Some wonder if they will ever receive what's due to them before they shut their doors and file for bankruptcy.
Small businesses are seeing each payment date pass by like dust in the wind with little hope for recovery. Some larger corporations are attempting to save themselves by freezing payments to small businesses that cannot afford the frozen cash flow.
How to tackle late payments
If you're a small business owner in the UK, you most likely are dealing with late payments right now. You have a stack of invoices on your desk that keeps growing, and you're not sure how to handle these without alienating your clients. Here are a few tips on how to track down late payers:
1. Prepare clients from the start
This tip is for the clients you're currently working with, the ones who walk through your door today. Your best bet in avoiding tracking down late payments is to make your policies clear with clients from the start.
So as you open your doors and begin to bring in new clients, let them know about your policies. Make them aware that they may have to pay a penalty if they pay their bills late or if you have to track them down. Do not get emotional, but make the policies clear both visually in writing and orally in your conversation with the client.
To serve all of your clients well, you need funds, and the only way to receive those funds on time is to be transparent with your clients from the start.
2. Early payment bonus
Offer a perk to all clients who pay you early. If a client is willing to pay you upfront for the work, then give the client a percentage off your service fee. This kind of payment will help keep your business afloat when other clients refuse to pay you for your services.
3. Early payment requirement
This is a preventative measure as well if you have chronic late payers. You can require your clients to pay your fee upfront before you've completed the service.
If you do not feel comfortable asking for payment before you've finished, you can ask for a portion of it. It's not uncommon for contractors who are receiving a large sum for a big job to ask for a third of the payment upfront, a third of the payment partway through the job, and the final third after the job is finished.
4. Payment plan
Offer your clients a payment plan once you've finished the job. If they cannot afford to pay you anything upfront, then set them up with a plan that includes a small interest fee.
The UK government has legislated that small businesses can charge up to eight per cent interest on late invoices. Your business can claim interest and debt recovery costs when other businesses do not pay you on time. The law does state that if you do not have a stated late payment date, the payment is considered "late" after 30 days, and then you can charge up to 8 per cent interest.
A payment plan can increase the chances you will be paid on time and will spend less time chasing payments in the end. Plus, customers will be more likely to make a small payment each month than a single large one. Then you will at least have some cash flow every month.
5. Charge interest on the invoice
You can warn your clients when they hire you that you will begin charging interest on the invoice once they pass the late payment date. Then, if the time comes, just start charging interest. You can set your accounting software up to do this automatically as well.
When clients see their cost go up, they will work harder to pay it. No one wants to pay interest.
6. Offer online payments
Customers are more likely to pay their bills if you make bill paying easy. Offer online bill-paying so they can just click a button and see their invoice disappear.
Find Help
As mentioned before, small business owners spend up to 90 minutes of their day tracking down delinquent bill payers. You have better things to do than track down those who don't want to pay you.
You can be proactive and get help before late payments jeopardize your financial position and threaten the life of your business. When you hire a professional accounting firm or accountant, you can take "tracking down delinquents" off your to-do list and let your accountant do your dirty work.
A professional accounting firm will help you weed through the stack of unpaid invoices you've been collecting these past few months.
Firms like ours offer services like invoicing and collecting. We also understand the impact that COVID-19 has had on business owners. We offer literature like a coronavirus small business guide.
If you're self-employed, we understand your needs as well. We've put together a coronavirus self-employed support scheme to guide self-employed individuals through this crisis.
Look for an accounting firm that understands small businesses. A good accounting firm does more than just manage your books. They can help you put together a business plan that works for your small business and will increase your chances of success in this fluctuating global economy.
You're Not Alone
The pandemic has caused us to become comfortable with social isolation. Do not isolate yourself in your business. You do not have to track down late payments alone.
When you hire an accounting firm such as ours, you can successfully navigate the murky financial waters that the pandemic has caused, and you'll have an ally in your fight against delinquent accounts.
For all of your accounting needs, request a quote here.
