A study on small and medium sized enterprises (SMEs) conducted by Xero revealed that small business owners are concerned about cash flow. It also highlighted that 55% of large organisations admitted to paying their small business suppliers later than the agreed payment terms in the last 12 months.
Also, a different survey by our strategic partner Tide revealed that SMEs across the country are chasing more than £50bn worth of late payments.
Late payments can cripple small businesses, which is why negotiating the correct payment terms with your customers can help to maintain a positive cash flow.
So how do you, as a small business owner, ensure that you reduce this risk in your own business? In this article, we answer some of our clients' most frequently asked questions.
What are the standard payment terms on invoices?
Most businesses give customers 30 days from the date of the invoice to provide payment; however, some extend this to 60 days, and in industries such as construction, some even go to 90 days.
Can I alter my payment terms?
Yes, have you considered requiring payment upfront from your customers?
Although some businesses may prefer not to do business this way, by requiring payment upfront, companies significantly reduce the amount of admin involved in ensuring that payments have been made on time and chasing those which have yet to.
This approach may only be suitable for businesses where the scope of work is wholly clear at the start of the working relationship.
However, this is the most significant step you can take to reduce non-payment by customers – eliminate the possibility of it by changing your payment processes.
Can I charge interest on late invoice payments?
You can charge ‘statutory interest’ - this is 8% plus the Bank of England base rate for business to business transactions.
However, this rate doesn’t apply if your contract with the debtor has a different interest rate. You’re also permitted to charge a fixed sum for the administration costs of chasing overdue payments:
- Up to £999.99 - £40
- £1,000 - £9,999.99 - £70
- Over £10,000 - £100
These amounts are set by statute and, therefore, can’t be increased.
How do I deal with overdue payments?
Although your payment terms may be included within your terms and conditions, there is often no substitute for ensuring that you communicate clearly with your customers.
Be extremely clear about billing at the start of the working relationship, and follow this up with an email. It is always more effective to set expectations at the beginning.
In addition, if it becomes clear that your scope of work is likely to go over an estimated price (or a price you know the customer is expecting), communicate this to your customer as soon as you become aware.
Being upfront and open with your customers will result in a more open dialogue, which means the customer is less likely to default on paying your invoice.
One way you can establish the scope of work for a project is by using a Statement of Work (SOW). To get started with your first SOW, you can download LawBite’s free template.
Free Statement of Work template
Can I put a late payment charge in my terms and conditions?
Your terms and conditions set the rules of your relationship with your customer.
It’s worthwhile to review your terms and conditions with a solicitor to ensure that they convey the payment terms you want to enforce.
Too often, terms and conditions only allow a business to charge interest when payment is made on time.
This restricts your options when dealing with a non-paying customer. Be sure to include a clause in your terms and conditions that allows you to charge interest and a late payment charge at a standard market rate if your customer fails to make a timely payment.
It is also highly advisable to include your key terms, including payment terms, on your invoice and to draw your customer’s attention to the payment terms when sending the invoice to them.
How do I monitor my customer payments?
From a practical perspective, you must have a system for monitoring the payment of invoices.
When an invoice becomes overdue, a staff member should be responsible for following up with the customer.
It’s also important that your business has a defined process for dealing with late payments. An example of such an approach would be:
- A gentle reminder email to your customers to pay as soon as possible
- A strongly worded email requiring payment immediately
- An email stating that you’ll take further action if payment isn’t made immediately
Following a third reminder email, you may escalate the situation by instructing a solicitor to take matters further.
Having a defined non-payment procedure in place will give you and your team greater certainty over how you approach these matters.
Can I take legal action for non-payment of invoices?
If you've tried to collect your businesses unpaid debt/s informally, for example, by emailing or phoning the client, the next step is to send a Letter of Claim.
This informs the debtor that the debt must be paid within the period set out, or legal action will commence. Most debtors settle payment following receipt of a Letter of Claim.
If the Letter of Claim is unsuccessful in obtaining payment or the debtor disputes the debt, you need to decide whether or not to write -off the debt or begin court proceedings.
If you choose the latter, you must follow the Pre-action Protocol for Debt Recovery Claims. Our debt recovery solicitors can assist you with navigating the complexities of taking court action.
Business debt recovery legal advice
Get legal assistance from LawBite
Communication, clarity and clear procedures will reduce non-paying customers in your business. Our team can give you legal advice and review your terms and conditions to protect your business and mitigate late payments and their effect on your business.
In the event of court litigation, we're well equipped to represent you. For litigation we charge £255 per hour (+VAT) with a minimum of 7 hours per matter. You can find out more about how our rates work here.
To speak to one of our expert lawyers, book a free 15-minute consultation or call us on 020 3808 8314.
Additional resources
- How to prepare for a recession
- What is a business cycle?
- Business Insolvency, what you need to know
- Rightsizing your workspace
- Pre-litigation process for commercial disputes
- How to amend an Employment Contract
- The Consumer Contracts Regulations 2013
- What is a construction contract?
- Breach of contract – a quick guide
