Poor trading in December and fuel costs squeezing margins. Looming tax payment deadlines. The VAT rise. Economists may worry about whether or not we’re heading for a double-dip recession, but for many growing companies, cash flow is already stretched close to breaking point.

To make matters worse, the spectre of late payment is looming larger. Big companies using their purchasing muscle to strongarm smaller suppliers is an all-too-common spectacle. Sue Stedman, founder of the eponymous corporate clothing business, has noticed an increase in payment periods, predominantly driven by larger, blue-chip businesses.

‘Before, payment terms were regularly set at 30 days once the service or product had been delivered to the client – this was fairly standard practice and what I believe we generally expect to see when doing business with all customers,’ she says.

Now, terms have been stretched to 60 days or longer. ‘This continual extension of payment periods is creating a cash flow hurdle for many small firms, who have suppliers and staff members to pay yet do not have the luxury of three-month payment holidays.’

Late payment equals big problem

Nick Morgan, CEO of building maintenance services firm First National Services, experienced the common problem of smaller clients paying fairly quickly but the bigger ones delaying.

One customer, a source of almost half the company’s work, was particularly awkward. ‘We sat down and had a meeting with this customer, and they told us that if we took them to court for their late payment they would drop us,’ says Morgan. ‘How do you deal with a company like that? You want the work, but you also need to get paid.’

Understandably, the situation was having a severe effect on payroll every month.
‘It got to a point where we were almost finished as a company – we were on the brink,’ he adds. First National turned to factoring, after which the company was able to pay staff on time every month, raising the bulk of its monthly invoices towards the end of the month and getting the funds the next day.

‘It’s about the same charge as an overdraft, but the problem with the bank is the guarantees that they want. Factoring is much more flexible – they’re not looking for charges on property. Without it we wouldn’t be around today.’

Most companies will hope to avoid such an unpleasant experience by being firmer with clients to start with.

John Judge, managing director of commercial management business Judge 3D, says, ‘If payment is late, pick up the phone and have an informal conversation with the client to seek to understand why it is late. There may be a simple reason. If you’re not satisfied with the explanation, request a face-to-face meeting to resolve the issue.’

Late payment interest and compensation

A frequent excuse is that there’s a problem with the paperwork – a variant of the old ‘cheque’s in the post’ line. Says Judge, ‘If the invoice is due in 30 days, I wait 20 to 25 days and then liaise with the contact to politely find out whether everything is OK with the payment and it is still due to go through on time.’

‘In this situation you have to be proactive, but not aggressive. Be open and honest, and keep a record of everything. If the situation develops, you have to decide whether to forego the payment or escalate your case to the county court.’

Perhaps a lesser-known weapon for suppliers is late payment interest and compensation, which, by law, can be claimed for any invoice not paid within the credit period.

Businesses have up to six years to claim the compensation, which amounts to £40 for debts of under £1,000, £70 for debts between £1,000 and £10,000, and £100 if the amount owed is £10,000 or more. The late payment interest rate is 8 per cent above the Bank of England base rate, and is set at the end of the preceding June and December.

The system isn’t widely used, for a fairly obvious reason. Jonathan Alder, litigation executive at law firm Howard Kennedy, explains, ‘People don’t want to frighten their customers off. They’ll only use this legislation if they realise they’re unlikely to get any more subsequent business from that customer.

‘A claim for interest is a very formal process. It’s one thing to charge a penal rate of interest at base rate plus 8 per cent, but when the customer sees they have to pay compensation for late payment as well, the supplier understandably fears damage to their relationship.’

Using a Factoring Firm

Outsourcing your credit control process to a factoring firm can be one way to take the pain out of chasing payments, or at least that’s what the factoring firm will tell you.

Alliotts, an accountancy firm, has 14 partners who used to take on the job of billing their own clients. ‘Some would pick the phone up themselves, while others would ask their secretary or the office administrator to chase the money,’ says partner Ian Davies.

While some partners proved good at this, others found it to be a struggle. ‘We ended up being approached by a company that takes care of credit control, and for around £1,000 a month they would inherit from us the process of cajoling clients to ensure our invoices got to the top of the pile,’ he says. ‘It’s probably as cost effective, if not more so, as taking on an in-house credit controller.’

The system involves a series of reminder letters sent out to the customer using templates that can be tweaked to produce the right tone and keep client relationships harmonious. The first letter sets up expectations and then subsequent communiqués are sent every eight days, using increasingly strongly worded terminology.

It is always important to strike the right balance between being assertive and not compromising client relations, says Davies. ‘Despite the new system being brought in, one or two of the partners wanted to retain ownership of the phone call for certain clients as they felt the situation would be more manageable in terms of keeping a good relationship if they dealt with it themselves.’

Keeping credit control in-house

For some business owners, the notion of bringing in a third party to collect payments from clients just doesn’t work. Stedman believes that over the long term, factoring can have a damaging effect on a growing business.

‘With the introduction of a factoring company, not only are you creating a barrier between you and your customers, but the fees on such services could eat into profit margins and potentially spiral out of control the longer an invoice remains unpaid,’ she states. Her advice is simple: ‘If your clients are late-paying, find out why and work together to solve the problem.’

If you do decide to keep credit control in-house, technology can help. Anne Burvill, financial controller at distributor DCS Europe, utilises a bespoke program that pulls out the company’s sales ledger onto database software. The system allows Burvill to target the accounts by length of outstanding debt, allowing the company to identify those that have fallen over the payment terms threshold.

DCS, as a larger company with a more comfortable cash flow situation, has the luxury of being able to put further business on hold until outstanding invoices are paid. ‘We immediately put those late accounts on stop, so there’s no more processing allowed. We then revisit it during the day and find out why it is they’re overdue. If there are any orders in the system, we contact the company to say that their orders will be held up because there are invoices overdue for payment,’ adds Burvill.

Many companies feel consumed by the pressures of late payment, but there is a multitude of strategies you can adopt to increase the chances of getting your money on time. Whether it be through gentle persuasion, an outsourcing arrangement or just a scrupulous and persistent credit controller, a proactive approach can help prevent your company being put in jeopardy by this most common of business bugbears.