5 ways to mitigate late payments – and save your business from disaster

Being thrifty and clear T&Cs are just some of the ways to protect against late payers, says the FSB’s Dave Stallon

The impact of late payments on small businesses and the self-employed are shattering: research from the Federation of Small Businesses (FSB) has shown that the issue causes 37% of small businesses to run into cashflow difficulties, whilst 30% have been forced to use an overdraft and profits have suffered for 20%.

At the extreme end, cashflow difficulties cause businesses to fail. The FSB estimates that late payments cause around 50,000 business closures a year, with the average value of a late payment owed to a small business standing at £6,142.

Despite most small businesses being savvy about cashflow, the majority of late payments (84%) to small businesses and the self-employed are more than two weeks late, with an average delay of about six weeks. It’s worth being aware that large businesses are the most likely to pay late – 61% of late payments are from large private firms.

This is why the FSB lobbies government to tackle the worst payment practices and was the reason the FSB Debt Recovery service was launched. Small businesses using it can expect to recover 100% of the debt owed, whilst not being charged any fees or commission. As part of the service, a free solicitor’s letter is sent on your behalf, which is often all it takes to prompt late payers to act.

Late payments can be particularly crushing for start-ups which often need more than one income stream to support the flow of cash into the business. There are strategies that you can put in place to try and curtail damage from late payments – essentially ways to minimise expenditure whilst maximising income. For example:

Maintain your cashflow forecast

Make sure your cash flow forecast is a true reflection of what you really need, as opposed to what you want. Map out forecasts on a monthly, quarterly, as well as annual basis.

Minimise expenditure

Think creatively about how you could minimise expenditure. For example, could you lease, borrow – or even share – equipment, rather than investing in your own? Think about utilising networking organisations to pool ideas and get inspiration. FSB Connect is the UK’s biggest business networking group, and is free to join.

Buy second-hand

Think about buying equipment from auctions or second-hand websites instead of forking out huge sums on brand new. Perfectly serviceable equipment can be found online for much more reasonable prices and, especially for a new business, having the best, latest and most expensive stuff shouldn’t be a priority.

Save for later

You could put aside around 30% of revenue for tax, to avoid being hit later. This could also be used as a contingency fund to help ease the situation in the short term in the event of late payments.

Have clear terms and conditions on your invoices

Make sure that your terms and conditions are very clearly set out at the beginning of your invoices. Keep across all your invoices and chase them even ahead of your maximum payments terms. Check what date of the month when the pay run is for your payee and check that your invoice met this after you submitted it.

Dave Stallon is commercial director at FSB, the UK’s biggest business group which has a national network of members. FSB is a member-led, not-for-profit organisation that offers its members a wide range of vital business services and advice, as well as a powerful voice in government. Find out more at FSB.org.uk