Preventing late payments – don’t rely on the law!

In our March article on late payments, we looked at how the law has recently changed to help protect smaller businesses against the risks of late or non payment. However, questions still remain around how much protection is actually being offered to suppliers.

For example, the new rules state that customers can’t request payment terms of longer than 60 days to be written into the contract unless they can show that a longer period isn’t ‘grossly unfair’ to the supplier. But what does ‘grossly unfair’ actually mean? The concept is fuzzy at best! And does it imply that it’s OK for customers to impose terms that are merely ‘unfair’, but not ‘grossly unfair’?

This is just one of the issues that are causing concern. It may be that the only answer to the late payments problem is to change the law again, so that the time limits for paying commercial debts become non-negotiable. This is already the case in some countries such as France, where companies can find themselves subject to large fines and even criminal proceedings if they don’t pay their bills on time.

Whatever your views on the revised late payments laws, it’s not a good idea to simply assume they’ll protect your business! Instead, you should take action now to address any late payment issues you’re experiencing at the moment, or to prevent problems arising in the future. Here are a few pointers that will help:

1. Customer not paying? Find out why.

There could be a good reason why your customer hasn’t paid on time. Maybe they’re not happy with your work, in which case, this is most likely to be because they didn’t fully understand what you were (and weren’t) offering to do for them, or because there were delays that were unavoidable or created by the customer themselves.

Talking to your customers and finding out the reasons for non-payment should sort things out. And in the future, make your sure quotes and terms and conditions are crystal clear so you and your customer both know exactly where you stand.

2. Protect yourself with staged payments.

Asking for payment in two or more stages will help preserve cash flow whilst you’re working on larger projects. Where appropriate, you could also consider asking for a deposit or partial payment up-front – perhaps when you’re dealing with a new customer, or someone who has delayed paying you in the past. Make sure the details of any staged payments are set out clearly in a written contract before you start work.

3. Have a clear payment process in place.

Tell your customers when you expect to be paid and remind them of the payment terms when you send their invoice. Follow up with regular reminders or statements until the bill is settled in full.

You should also encourage your customers to tell you straightaway if they’re having problems paying. You may be able to accommodate delayed or staged payments, but only if you know about them sooner rather than later! Make sure any changes to your original payment terms are agreed in writing; an exchange of emails is fine.

4. Know your rights to charge interest and recovery fees.

The changes to the Late Payment of Commercial Debt (Interest) Act 1998 that came into force on 16 March 2013 mean you can now reclaim ‘reasonable recovery costs’ from late-paying customers.

This is on top of your pre-existing rights to charge a set fee that depends on the amount of the debt, as well as interest at the current Bank of England base rate plus 8%. You don’t have to invoke these rights, but make sure you’re aware of them.

5. Don’t let non-payers get away with it.

Occasionally, you may encounter the customer who just won’t pay – and for no good reason. Don’t set a precedent by letting them get away with it. There’s an online government-run service that you can use to reclaim the debt, or I’m always happy to recommend a reputable debt collection agency or solicitor.