New powers to address late payments and our top tips on how to manage late payees
Today’s blog post is all about late payments – something most business owners will have had to contend with at some point. From government support to our top tips for helping you manage late payments, today’s post may be just what you needed.
Government Responds to Late Payments Consultation
The government has published its response to the late payments consultation that ran from July to October last year.
It is estimated that late payments cost the UK economy £11 billion every year, and most businesses are familiar with the pain of dealing with late payments.
Here we summarise the changes that the government intends to legislate for to help address the problems created by late payments.
Powers for the Small Business Commissioner
The Small Business Commissioner will be given powers to:
- Investigate businesses suspected of poor payment practices or inaccurately reporting payment performance.
- Settle payment disputes outside of the court process.
- Fine businesses, including significant potential fines for large companies that persistently pay their suppliers late or fail to comply with late payment legislation.
Maximum payment terms and mandatory interest
Other than for strictly limited exemptions, maximum payment terms of 60 days will be imposed.
A requirement will be introduced that all commercial contracts will contain a right to statutory interest at 8% above the Bank of England base rate.
Disputing invoices deadline
A statutory time limit will be introduced for raising disputes and compensation required when deadlines are not met.
Scrutiny of payment practices
Boards or audit committees of any persistently late-paying large company will need to publish a commentary on why payment performance is poor and what actions are being taken to improve this.
Construction retention payments
The practice of deducting and withholding retention payments under construction contracts will be banned.
What happens next?
The government have said that they intend to legislate these changes as soon as Parliamentary time allows.
In the meantime, take a look at our accompanying article that gives you three practical tips that can make a real difference to reducing late payments.
Three Practical Tips to Deal with Late Payments
If you run a small business, you will know that late payments can quickly turn from an irritation into a full-blown cash flow problem. The government’s response to the recent late payments suggests that there will soon be additional legislation to help deal with the problem.
In the meantime, here are three practical steps you can take that can make a real difference.
1. Make it easy and obvious for customers to pay
Late payments from customers are not necessarily deliberate. At times, they are caused by confusion or missing information.
A few small tweaks can cut down on a surprising number of overdue invoices. For example:
- Put your bank details on every invoice and make them large enough to spot at a glance.
- Add a clear “Payment due by [date]” line in the top section of the invoice.
- Offer more than one payment method if possible.
- Send the invoice on the same day the work is completed. When a job has gone well and the customer is pleased, payment may be more rapid.
2. Set expectations early and repeat them often
Embed payment terms into your communications with the customer throughout the work you are doing for them. For instance:
- Before you start work, confirm the price and payment terms in writing.
- Reconfirm those terms on the quote, on the invoice, and in the first reminder.
If you need deposits or staged payments, say so upfront. Many customers will take this well when it is framed as a normal part of your process. For example, you might say: “We take a 25% deposit to secure the work, with the balance due within 14 days of invoice.”
3. Be polite but firm when chasing, and follow a set routine
Chasing overdue invoices feels awkward, so it can be tempting to leave it in the hope that the customer will pay before you have to say anything. However, that can mean leaving it too long.
A routine takes the emotion out and keeps things consistent. For instance, you might try:
- Day 1 after the due date has passed – Send a friendly reminder to check that the invoice has not been missed.
- Day 7 – Be firmer, include the invoice again and ask for a specific payment date.
- Day 14 – Let the customer know that late payment interest may be charged under the Late Payment of Commercial Debts Act. You do not need to actually apply the interest unless it is appropriate.
Some customers will still be slow, whatever you do, but many will respond well when you keep things polite, clear and businesslike.
In conclusion
In practice, managing late payments is mostly about consistency and having a simple system that you stick to.
If you would like a hand setting up reminders in your accounting software or working out a set of payment terms that are fair and easy to communicate, please just let us know. We can look at what you are doing now, suggest a few practical adjustments and help you put something in place that’s straightforward for you and clear for your customers.