Many UK SMEs are losing thousands of pounds and days of resource annually as a result of overdue or unpaid invoices. Here, Tristan Duncan, partner at MLP Law, takes a deeper look into the extent of the problem and how SMEs can tackle the issue effectively.
In the business world, cash really is king. Without a steady source of funding, a business can really struggle to grow. It can have a huge impact on cash flow when customers fail to pay for the services that they have received. In order to understand just how much of an effect unpaid invoices are having on SMEs in the UK, we conducted a survey to investigate how many companies were falling victim to late payments.
The results of our research revealed that 64 per cent of businesses surveyed suffer from late payments which cost them up to £15,000 a year, while 4 per cent were facing shortfalls of over £50,000 every year. What’s more, the latest figures from Bacs Payment Schemes showed that SMEs across the country are facing a £8.2bn annual shortfall as a direct result of unpaid invoices. Sadly, more than half of businesses fail within the first 5 years due to financial issues, including the high cost of running, as well as late payment and cash flow issues.
Put simply, a company is usually set up to provide a service and, in turn, be paid for that service so that it can continue to operate and invest in a sustainable future. If invoices go unpaid, then businesses will experience cash flow issues which, if big enough, could mean that the company is unable to pay staff members or suppliers. In fact, some of the most common consequences of unpaid invoices that were cited by respondents in the research were cash flow issues, being unable to pay employees and suppliers, stunted business growth, loss of time and resources and strained relationships with suppliers.
All of these problems could spell disaster for a business and if the problem is persistent result in its insolvency. This is a worrying scenario and although there is legislation in place to help businesses to be more likely to be paid on time, some businesses are still facing problems when it comes to collecting what is rightfully theirs – especially from large corporates. A lot of businesses are finding themselves coming up against the issue at least once a month, according to our survey, with over half saying that they actually write 5 to 10 invoices off annually as a ‘bad job’.
It’s concerning that many businesses still don’t know how to tackle issues surrounding cash flow and are not seeking legal advice as they believe it will cost too much or say they don’t have time. For example, our study found that 68 per cent of the businesses surveyed didn’t seek legal advice predominantly because; they thought it would cost too much (48 per cent); they didn’t have time (34 per cent); they didn’t see the value (21 per cent); they didn’t know where to start when seeking help (12 per cent).
So, what can a business do if it finds itself chasing late payments?
In some instances, it may be possible to obtain payment in advance for the goods or services that are being purchased by the customer. This will eradicate the need to chase money, as it enables the business to delay delivering the service until the payment has been received – no payment means that the business doesn’t supply the goods.
When this is not possible, it’s important to state on each invoice, and in any contracts, that the customer has a short time period to make the outstanding payment. Stating in your contract and on the invoice a short time period before interest starts accruing at 8 per cent per day which is compounded monthly also focusses minds, as does a small discount (say 5 per cent) for payment within 7 days.
When issuing the invoice, ensure that it is sent via an email containing the bank details for where payment should be sent. This undermines the usual excuses that the customer hasn’t had it and makes payment easier.
For each customer, strict credit limits should be set and these need to be stuck to. Otherwise the customer could accumulate various invoices and if these all go unpaid, it will be much harder to chase them and acquire the money from them all.
When it comes to chasing debts, pick up the phone and speak to the customer. It’s good to talk and this usually gets better results than sending out endless amounts of emails and letters that can easily be ignored. Try to end each conversation with the customer by obtaining at least a part payment – that way at least something will have been achieved from the conversation.
A strong cash flow is paramount to the success of any business and the issue of unpaid invoices appears to be on the rise. It’s important that business owners understand their rights and are aware of the steps that they can take to acquire the money that they are owed. Ensuring the success of a business is difficult enough without having the added stress of chasing invoices.
Tristan Duncan.
