Calling time on late payments

In the first of a new series of articles, Michael Chambers, managing director at BACS Payment Schemes Limited, offers advice to small businesses on combating late payment.

Small businesses were given government backing on the potentially crippling issue of late payments in 1998 with the introduction of the Late Payment of Commercial Debts (Interest) Act, paving the way for businesses to claim statutory interest upon late payments from large businesses and most of the public sector.

Although the UK was one of the first countries in the EU to introduce late payment legislation, it can be a difficult decision for businesses to make, with many shying away from taking action for fear of damaging their business relationships, and worries over additional time and costs. While the deliberate withholding of payments to businesses is nothing new to many SME owners, the real issue is whether you choose to ignore it or not. One thing's for sure – the issue's not about to go away.

Research conducted by BACS found that around one third of SMEs experience late payment problems in the UK, and are, in fact, collectively owed over £11 billion at any one time. This resulted in around 10% of small businesses that experience late payments not being able to pay their staff on time and 38% struggling with the company's bills.

A year on, although many businesses are still chasing unpaid bills, some SMEs are now taking more preventative measures such as asking people to pay electronically. This means that not only are funds available for use on the day received, businesses may be able to earn interest earlier, rather than having to wait for cheques to clear. This is just one of the tips we recommend to help businesses to become more proactive and tackle the problem head on.

Other tips for businesses to consider:

Contact your bank - they will advise on the most appropriate and cost effective payment method for your business. They will also need to authorise your use of automated payments if you want to start paying your own suppliers and bills electronically, or collecting monies owed using Direct Debit.

Become regular - take the stress out of paying regular bills by using Direct Debit or Standing Orders. Identify the payments that absolutely have to be made on time and set up automated payments so you can focus on more important issues.

By taking some simple precautions the risk can be reduced, allowing companies to focus more on business growth and less on business debt.

CASE STUDY

When Tony Fisher set up his own electrical engineering business in 1990, he had no idea that he would be so successful, or that in 15 years time he would be employing five members of staff and travelling all over the UK and Europe to satisfy his customers. During his time as a small business owner, Tony, who is based in Walsall in the West Midlands, has experienced his fair share of business headaches from late payers to under-performing staff, and has learnt a few payment-related lessons to stand him in good stead for the future.

Tony's business commitments mean that he and the rest of his staff are often on the road, and days in the office pushing paper and dealing with bills and payments are few and far between. Tony comments, "When we first set-up and spent a lot more time in the office, processing payments and handling wages was a manageable burden. However, as we expanded and started to spend more and more time on the road, the situation changed."

Tony began to notice that he often had cash flow problems, usually when he hadn’t had time to pay in customer’s cheques during busy working periods. He also discovered that he was having to turn away new customers to leave enough time to manage necessary business paperwork, such as paying his staff's wages.

Tony adds, "It soon became clear that things were getting out of control. On a couple of occasions we were all so busy working that nobody got paid on time – and we were all so preoccupied that it took a couple of days for anyone to notice! Similarly, some of our customers were contacting us asking when we were going to take payment. The whole system was a mess, and it was making us look extremely unprofessional."

Tony investigated all of the options available to him, and decided to change his payment processes and aid his cash flow management by switching to automated payments. Tony went down to his local bank and set up automated payments to settle his staff's wages.

Tony was surprised by how easy it was to get started, "Setting-up was a doddle. I had absolutely no idea that my business could benefit from a service that is free to implement and requires little maintenance."

He also immediately felt the administrative burden lift, as the management of his regular payments decreased dramatically. Instead of having to process staff wage cheques and queue at the bank to pay in fees, Tony keeps his accounts up to date at home and an eye on his bank balance. In four years, he is yet to spot a single incorrect or missed transaction.

Since making the switch, Tony hasn't looked back. All his staff benefit from the security of a reliable monthly wage with a greatly reduced scope for human error or delay, while his customers know exactly when payment will be leaving their accounts.

"Now, our payments run like clockwork and our business relationships have really benefited from the clarity of the new billing process. Automated payments have allowed us to expand our business, without risking the financial health of our business, our staff or our suppliers."