How to get paid faster

A staggering £23.4bn is currently owed in outstanding invoices to UK businesses, according to UK government estimates.

Bad debt can suppress SMEs’ growth, push them into insolvency and damage economic prospects. There is also a personal cost to self-employed people, who have reported feeling stressed about their financial situation – causing them to lose sleep and confidence. Bibby Financial Services’ latest SME Confidence Tracker finds the average bad debt among SMEs has risen 61% in one year to £16,641.

More than a quarter of SMEs (around 1.5 million) are struggling with bad debt, while six in 10 businesses say it’s taking longer for customers to pay their invoices in full.

Improving the payments culture

To deal with what they describe the UK’s ‘poor payments culture’, the Federation of Small Businesses has called on the government to make several reforms, including:

• Committing to legislate to limit the maximum payment terms to small suppliers in law by 2027 if the situation does not improve
• Banning late payers from public procurement contracts
• Giving audit committees of large firms oversight of payment practices and reporting on progress in their annual report
• Making the Prompt Payment Code (PPC) mandatory for all local authorities (LAs), and creating a payment practice league table for LAs with financial incentives.

The government’s new Department for Business and Trade (DBT) is reviewing prompt payment and cashflow this spring. The review is examining the progress made in specific economic sectors, and how to improve arrangements for supporting small businesses experiencing difficult payment practices. The review’s terms of reference include the current payment reporting regulations, the Prompt Payment Code and the Small Business Commissioner.

Your organisation’s options

While this review is underway, small businesses will have to navigate existing laws, and use the options available for getting paid in this current environment.

These are typically in the areas of:

• Having a routine system in place to deal with a payment which has become due
• Managing cashflow and securing credit and assistance from the bank
• Recovering debts, and legal action including reminder letters, charging interest, court proceedings and writing off bad debts

Contractual terms and conditions

Taking some of these in turn, common advice from solicitors and accountants to SMEs is to create clear terms and conditions in advance as part of their contract with each other. This is likely to mitigate the potential for disputes over payment methods and timings. Information that’s recommended to specify in the terms and conditions can include:

• Acceptable methods of payment
• Payment due dates
• Penalties for late payments (e.g. fees or interest rates due)
• Any additional fees due like credit card fees and VAT
• A requirement for compliance with government and tax legislation

Once they are complete, they must ensure that their clients have signed the contract, including the terms and conditions, before they provide any goods or services. Template T&Cs are also available online, and some accounting firms who specialise in credit control procedures can guide SMEs through this process.

Debt recovery for small businesses

For those debtors who fail to pay an overdue invoice following standard credit control procedures, there are two types of letter available.

Firstly, the pre-action protocol-compliant ‘letter before action’ (LBA) and ‘late payment demand letter’ (LPD) give the debtor a short period in which to make a payment or respond with suitable payment proposals. Not all of these will receive a response, and some will require an escalation in the process and issuing court proceedings can be a next step.

If a court determines that a debt is properly owed, it will make a judgement in favour of the claimant and a period will be stipulated for payment (usually a fortnight). If this payment is then not made, the court can enter the enforcement process, where the debtor is forced to pay.

There are various enforcement options available, with each method having its own strengths and weaknesses. These include:

• Instructing bailiffs to seize assets to be sold to pay off the debt
• Providing that a proportion of the debtor’s earnings are deducted by their employer and paid direct to the creditor until the debt is fully repaid
• Freezing bank accounts and seizing money on behalf of creditors
• Imposing a charge on the debtor’s beneficial interest in a specific asset

It is also worth remembering that debt claims must be brought within six years of the sums falling due or they become statute-barred and unenforceable; at that point, they should be written off as a bad debt.

Recovering cash from debtors is partly about ensuring you know who you’re dealing with – monitoring them and trying to get an inside track on their cashflow and any issues as they develop – and partly about getting to the front of the queue, explains Mike Pavitt, head of corporate restructuring and insolvency at Paris Smith solicitors.

“A legally compliant protocol letter from a solicitor, a legitimate threat of a statutory demand or (for corporate debtors) winding up petition can often achieve the latter, particularly where the debtor is a larger entity and/or may suffer reputational damage if they fail to pay on time,” Pavitt says. “But great care has to be taken that the steps you take do not backfire with adverse costs.”

Improving your chances of payment

Smaller businesses have options to improve the chances of getting paid on time. Pamela Phillips, co-founder and director at accountancy firm de Jong Phillips, suggests:

• Sending email payment reminders. Simple but very effective! Automating this with apps that plug into your cloud accounting software (e.g. Chaser) helps with this.
• Adding a payment link to your invoice, e.g. Stripe or PayPal, to make it easier for customers to pay.Requiring payment by direct debit (e.g. GoCardless).
• Taking an upfront deposit before starting work.
• Credit checking new clients before starting to work with them, and checking their average payment times.
• Calling overdue debtors.
• Using debt collectors (this can be done cost effectively through Chaser).