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How to prevent late paying invoices

Customers paying late is one of the biggest issues for the UK's SMEs. According to insurance company Zurich, the total 'late payment debt' for both large and small businesses in the UK now stands at £44.6 billion.

It can be hard to avoid late payment, but there are some procedures you can implement to help you minimise your risk.

Have clear payment terms

When you take a new customer, having clear payment terms that detail when each invoice should be paid, is crucial for effective credit control. However, the agreed payment terms are only part of the terms and conditions of business. It is also very important to ensure that payment terms are incorporated into client/customer agreements. If you do not lay out your payment terms and agree on a payment date, the customer must pay within 30 days of receiving goods and/or services. However, you can contractually agree longer or shorter payment terms if you wish.

The terms and conditions should also state what happens in the event that the customer does not pay on time. For example, charging a late payment fee, a rate of interest, or both. Under the current Late Payment of Commercial Debts (Interest) Act 1998 you can charge interest at up to 8% over the Bank of England base rate and charge a compensation fee per invoice that ranges between £40 and £100 depending on the value of the invoice.

Enforce your payment terms

The Late Payment of Commercial Debts (Interest) Act 1998 was set up to deter late payments and to compensate creditors for the late payment of debts. As mentioned above, you are within your legal rights to charge interest and compensation for any outstanding late payments. You are also able to collect reasonable costs for collecting the debt.

Enforcing your terms and conditions is vital to avoiding late payments. But some businesses do not always adhere to their own payment terms as they are worried about damaging their relationship with their customer.

Tom Smith, Partner and Head of Dispute Resolution at Forbes, advises: "I would urge you to think about whether you actually want them as a customer if they are repeatedly a bad payer.

"By enforcing your payment terms, you let your customers know where they stand and may help to deter late paying in the future."

It is believed that around 50,000 small businesses go bust every year because of payment delays, despite voluntary schemes and a raft of legislation from both UK Parliament and the EU.

According to an article in the Independent, smaller businesses in the UK have not wanted to confront larger suppliers. Other European countries such as Belgium and the Netherlands have seen late payments fall in recent years while the UK has seen no such reduction.

Blame someone else

Depersonalising the debt collection process can be an effective way to deter late payments.

"One of our clients has commented that they make it clear to customers that taking further action is a requirement of their insurance policy after 30 days. Justifying legal action in this way shows to clients or customers that the decision is not personal and is out of your hands," said Smith.

Using a legal partner for a financial dispute is another way of depersonalising the recovery of late payments. Businesses will often take the debt much more seriously after receiving a solicitor's letter and are much more likely to take action. It also indicates to the debtor that you are serious about recovering what is owed.

Forbes Collect is a solicitor led debt recovery service that uses an efficient and cost effective system to maximise your return on commercial debts. For more information or to instruct us today, contact Forbes Collect on 0800 689 4176 or email us on forbescollect@forbessolicitors.co.uk.

Learn more about our Forbes Collect department here

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