Unpaid invoices: over 50% of UK small businesses are paying the price

Unpaid invoices are the hidden struggle of small business owners in the UK, according to new findings.

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Over half of small and medium enterprises (SMEs) in the UK are still struggling with unpaid invoices from 2022, according to a recent survey conducted by NerdWallet

The survey explored the experiences of SME owners, decision-makers, and freelancers in the UK regarding late payments and their effects on their businesses. 

The results highlighted the increasing problem of outstanding invoices, with over half of the businesses still awaiting payment for invoices from the 2022 tax year.

How unpaid invoices impact UK SMEs

The survey revealed that late payments cause significant disruptions and pose real challenges for business owners. They disrupt the cash flow necessary for completing payroll for their employees and covering essential expenses on time.

They also lead to cutbacks in expenditure and recruitment and impact staffing levels. Most concerning, many business owners were not actively pursuing payment for overdue invoices or charging interest on repayments, despite being entitled to do so under UK legislation.

Whilst the data showed that around 35% of invoices were less than a month overdue, and 27% were between one and three months late, an alarming 20% of business owners reported having outstanding invoices from four to six months ago.

Equally, 39% of SMEs had either already made or were considering making reductions to their overheads as a result of unpaid invoices. These reductions included downsizing office spaces, adopting remote working arrangements, and cutting team social spending budgets. 

Recruitment efforts were also affected, with 28% of businesses pausing hiring activities due to outstanding invoices – and one-fifth of business owners reported freezing planned pay rises for employees, and 22% indicated they may have to make staff redundancies to offset the impact of late payments.

In terms of pursuing payment, most business owners typically waited a week before taking action for unpaid invoices. Half of the respondents sent reminders every week until invoices were paid, while a quarter pushed for payment on a daily basis. 40% of SMEs followed up with a phone call or letter in case of payment failure. Surprisingly, only 23% charged interest on top of the agreed amount for each reminder, and merely 11% claimed debt-recovery costs.

Some businesses had to resort to more drastic measures to collect payments. 14% had to engage a debt collection agency, and 8% were forced to write off the invoice entirely. 

Shockingly, 22% of small business owners were willing to wait and do nothing while the client remained unpaying.

Managing unpaid invoices: tips for taking back control

It's essential for business owners and freelancers to find ways to mitigate the cash flow issues caused by late payments. Here are a few practical tips: 

  • Regularly review your invoicing process: ensure that your invoicing process is efficient and streamlined. Send out invoices promptly and clearly state payment terms and deadlines.
  • Follow up promptly: don't wait too long to take action on unpaid invoices. Send reminders to clients emphasising the importance of timely payment. Consider automating reminders to save time and effort – you can use accounting software to do this.
  • Charge interest on overdue payments: familiarise yourself with the legal provisions that allow businesses to charge interest on late payments. In the UK, you can charge interest of up to 8% plus the Bank of England base rate for business-to-business transactions.
  • Communicate assertively: if reminders don't yield results, be proactive in your communication with clients. Consider making phone calls or sending letters to discuss the overdue payments and find a resolution.
  • Consider debt collection agencies as a last resort: if all else fails, you may need to engage a debt collection agency to recover the unpaid invoices. However, this should be a last resort due to the associated costs and potential strain on client relationships.
  • Seek professional advice: consult with an accountant or financial advisor who specialises in small businesses. They can provide guidance on optimising your financial processes, managing cash flow, and navigating legal considerations.
  • Plan for the future: to mitigate the impact of late payments, develop a financial contingency plan. Set aside funds to cover emergencies and unexpected delays in payment.
  • Strengthen relationships with clients: cultivate strong relationships with your clients based on trust and open communication. Maintain regular contact and address any payment issues promptly to ensure a healthy working relationship.

By implementing these strategies, small business owners can better manage the challenges posed by unpaid invoices, maintain a consistent cash flow, and safeguard the financial stability of their businesses.

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Written by:
Stephanie Lennox is the resident funding & finance expert at Startups: A successful startup founder in her own right, 2x bestselling author and business strategist, she covers everything from business grants and loans to venture capital and angel investing. With over 14 years of hands-on experience in the startup industry, Stephanie is passionate about how business owners can not only survive but thrive in the face of turbulent financial times and economic crises. With a background in media, publishing, finance and sales psychology, and an education at Oxford University, Stephanie has been featured on all things 'entrepreneur' in such prominent media outlets as The Bookseller, The Guardian, TimeOut, The Southbank Centre and ITV News, as well as several other national publications.

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