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KPMG Enterprise

Late payments – the scourge of SMEs

David Costley-Wood, KPMG’s Head of Enterprise Consulting

It’s a sobering thought that 1m SMEs, along with 5.7m jobs have been lost since 2008 – only now is activity recovered to previous levels. What is even more worrying is that according to insolvency trade body R3, late payment has been a major factor in 20% of these failures.

According to Brothers barometer, 20% of SMEs claim the situation has worsened in the past 12 months, and of those affected by late payments, over half say they have to write off up to 10%.

For entrepreneurs working all hours to grow their business and innovate, it’s an on going Catch 22. They need their customers to give them more orders and don’t want to harass them – but they need their cash as well, to survive.

So what’s the answer?

Firstly, prevention is better than cure, so although you’ll no doubt be delighted to see your new customer’s first order, you need to be sure they’re credit worthy. First and foremost, a good indication of your new client’s reliability is to agree terms for the exchange up front, then you can endeavour to get your first invoice paid on time, sending the right signs to the customer and helping to make sure you’ll be paid quickly for any on going work. Make it clear you will apply the European Directive on late payment, which allows you to claim interest, and your customer should know you’re in business.

Secondly, you might want to consider insurance; it can be costly, but can be necessary too. Getting a quote from a credit insurer will often reveal which customers are at risk and make sure your ‘all monies’ retention of title claim is on your orders, so if the worst happens, you can retrieve your product quickly.

Also, consider the simple stuff – it may seem obvious, but chasing in advance of payment dates makes it more likely that when the time comes, you can expect the balance in full, or you can identify any unexpected offsets ahead of time, noting any queries in monies and helping you maintain a good cash flow. Email reminders and requests for email receipts are a great way to help you begin to balance the books in this case, and mean you have all invoices stored together. Thinking about your original agreements with the customer, it’s also a good idea to include in your standard terms and conditions of sale, a clause for charging for Proof of Delivery copies, guaranteeing your customer has received goods purchased and that you are owed payment.

If you’ve taken all measures but your customer is still paying late, talk to them. Determining why they are paying late means you can both find a way to resolve the situation; good communication with your customer is key for avoiding late payments.

OK, so you’ve done all the above, but you’ve still got a late payer. What do you do?

Again – talk to the customer and ask immediately why. Sometimes there’s a dissatisfaction issue that has not been communicated or resolved, which can be frustrating, but if so, deal with it then chase for payment, making sure to get a promise of a date. This way, if they miss it you can increase the pressure justifiably. Failing this, consider getting in touch with the CEO of the company you’re providing the service for; as a business leader yourself, it’s highly likely they’ll respond and resolve the issue.

If you’re still not getting paid, there are decisions to be made on how you proceed. You could take your customer to court – but – it’s difficult to recommend a court route because (a) that’s probably the last time you’ll get an order from the customer and (b) the Ministry of Justice plans to impose a 5% court fee on such claims, which effectively means chasing any debt less than £10k through the courts is simply not worthwhile.

An SME client facing insolvency recently took the unusual step of immediately threatening to issue a winding-up petition against a debtor for an undisputed debt. This aggressive action produced payment and saved the business, but at the expense of losing the customer.

An alternative approach is using online funders to ‘factor’ individual invoices, which typically allows non-payment for up to 90 days. This carries fewer stigmas than it used to and can be done confidentially so the customer doesn’t find out. It can be expensive though and once the invoice trips 90 days, the cash impact is immediate.

So, overall, focus on ensuring you have systems that help you to manage this risk, communicate regularly with your customers and don’t let them get used to paying late.

Attached Files


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