15/07/2010

By David Knowles, business development director at Creditsafe

The economic situation is tough enough already without businesses having to worry about late payments. However, more than one in ten companies has been forced to reissue at least a fifth of their client invoices in the last 12 months.

The figure may not be surprising given the problems many companies are having with their cash flow. However, it doesn’t make it any more tolerable for the businesses left out of pocket by debtor’s delaying tactics.

Late payment isn’t just a matter of inconvenience it’s often a life-or-death issue for a business. Disruption to cash flow is one of the biggest contributors to company insolvencies and when combined with more limited access to credit facilities, may put thousands of businesses at risk of going under.

Sadly, delaying payment is becoming increasingly ingrained in the business culture of the UK. More and more firms are being forced into a position where they have to ‘pay it forward’: since they receive payments late and have insufficient cash reserves they pay their own bills later, resulting in a damaging domino effect throughout the economy.

The reasons for late payment are many: for some, it may simply be a case of procrastination or forgetfulness; in other cases, companies may want to hold onto cash as long as possible to earn interest and maintain liquidity. Significant numbers of firms are systematically putting in operational processes into their finance function to delay payments.

The good news is that are some simple steps that businesses can take to protect themselves against late payments.

First, they should address the terms and conditions they offer at point of contract, potentially introducing incentives for prompt payment and penalties for delays in settling-up. Late payers often use the delaying tactic of claiming “the cheque’s in the post.” Half of UK businesses that accept cheques found customers making what they believe are deliberate mistakes, such as failing to sign the cheque or writing the incorrect amount or date. A small carpet-fitting firm was informed payment would be delayed because “My husband has my cheque book and he has now been put in prison.”

Avoiding this problem couldn’t be simpler: refuse to take payment in cheques and insist on bank transfers for all payments. Every business is within its rights to do this, but again it’s best to make this clear at the beginning of any new business relationship.

When it becomes obvious that customers are deliberately delaying payment, there is often no other choice but to launch legal action. Often, merely the promise of litigation is enough to prompt payment; sometimes, the threat has to be backed up by action. This can be costly, time-consuming and stressful, especially for smaller firms who lack their own legal department. That’s why the government set up the Money Claim Online (MCOL) service which allows certain county court claims to be issued by individuals and businesses over the Internet, 24 hours a day. Claimants can request a claim online, check the status of the claim and, where appropriate, request entry of judgment and enforce a judgment by way of warrant of execution.

The best way for a business to mitigate against the risks of late payment is to assess the creditworthiness of an enterprise before entering into a relationship. Having sales, marketing and procurement teams alongside traditional credit controllers utilising credit referencing solutions can help ensure that businesses don’t trade with firms with poor payment histories, or else demand payment upfront for products or services rendered.

Late payment has been around since the birth of business; following these simple best practices will help ensure that payment doesn’t become a perennial problem.