Predictable, reliable cash flow can mean the difference between success and failure for an SME, especially during the cost-of-living crisis, so when customers are paying late it’s wise to deal with the issue immediately.

An FSB study published in March found that in 2022, 52% of UK businesses had experienced late payments in the previous three months, and 25% reported an increase in late payments in the previous three months.

The study was undertaken alongside the Department of Business and Trade’s Payment and Cash Flow Review – an initiative aimed at examining the impact of late payments on small businesses in the UK.

1. Clear communication
2. Payment reminders
3. Withdrawing credit terms
4. Cash flow forecasting
5. Debt recovery training

The first step in avoiding late payments should be clearly communicating your payment terms up front. Payment terms should be fair to both parties and should be agreed at the beginning of a business relationship. 

Payment within 30 days is a good standard to follow, but terms can vary in different industries.

After an invoice is issued, calling the customer before the payment-due date to make sure the invoice has been received and there are no queries, is considered by many companies to be good customer service. It’s especially important to issue reminders when you are expecting a large payment from a customer.

If a customer persistently pays late, consider whether you’re prepared to continue supplying them on credit terms. It may be better to lose an order than supply goods and not be paid. 

It might also be worth considering further action to recover the debt, like charging interest against the balance owed, and compensation for debt-recovery costs. You could also consider taking legal action.

However, always weigh up the cost of recovering a debt against the likelihood of payment. If a customer is insolvent, there may be little chance of receiving the money owed, potentially leaving you out of pocket for any legal fees.

Businesses should ensure they have enough finances available to meet their financial commitments, even in the event of payments arriving late. A regularly updated cash flow forecast can help with this. Monitor your cash flow as often as you can to spot any variances in payments.

If you think you might have a cash-flow problem, it’s a good idea to talk to your bank immediately to explore your options. Early communication will often help resolve the problem quickly.

Make sure you have debt recovery procedures in place to deal with late payments, and that your staff are well trained in how to implement them.

If a payment doesn’t arrive on time, it’s a good idea to follow up with the customer immediately with a letter, an email and a phone call. 

You may need to make the consequences of non-payment clear, but always remain professional. It’s important to maintain a good working relationship for the future.

Through our partnership with the Federation of Small Businesses, you can access independent support, information, webinars and 1:1 support on this issue. Visit their website.