Small Business Owners Beware: Late Payments are a Serious Issue
Late payments are a major problem for small businesses in the UK. The Federation of Small Businesses (FSB) reports that approximately 50,000 businesses close every year due to this issue. At a recent event called “Pay Small Businesses Promptly!” hosted by TSB and Jane Hunt MP at Portcullis House, Westminster, Small Businesses Minister Kevin Hollinrake called for more responsible payment etiquette. He argued that timely payment could prevent businesses from borrowing to compensate for the debt. However, Shadow Small Business Minister Seema Malhotra contradicted this claim by pointing out that no fines have been issued to companies who have failed to comply with their duty to report on payment policies and practices.
In response to this situation, the government recently launched the Prompt Payment and Cash Flow Review. One of the key issues under discussion is the powers granted to the Small Business Commissioner. Small Business Commissioner Liz Barclay puts the issue in more urgent terms, emphasizing the need for language adjustment. She states that businesses must be paid much more quickly, rather than being paid promptly on a 120-day basis. She also highlights the problem of extended payment terms.
The solution adopted at the event was to imagine UK small businesses being paid one week faster on average. Barclay argues that if this happened, £10bn more would go to small businesses. In turn, businesses would have the certainty to invest in equipment and upskilling, which would increase overall value.
What Are Late Payments?
Late payments occur when a business does not receive payment promptly or within the agreed time frame. Since small businesses often run on a tight budget, the effects of late payments can be dire. It can also affect their relationship with suppliers or partners.
Therefore, it is important for businesses to establish payment policies and to be prepared to follow up with reminders or penalties when necessary. But why do businesses delay payment in the first place?
Why Do Businesses Delay Payment?
Late payment can stem from several factors. For example, the financial instability of the payor or their lack of organisation in paying bills can be a reason. Sometimes companies may use extended payment terms to improve their own cash flow or to invest in other areas of the business. However, industry experts suggest that it is possible to do so without exploiting the other party. By making changes to payment policies and strategies, businesses can make timely payment a priority for all parties involved.
How to Avoid Late Payments
As a small business owner, businesses can take practical steps to avoid overdue payments. One useful strategy is to be proactive and establish clear payment terms upfront. These terms should be communicated in writing and communicated to all relevant stakeholders. This can include the length of payment terms, financing terms, and any late payment penalties.
Additionally, technology can be used to automate payment follow-ups, thus ensuring that invoices are paid on time. Payment software programs can be used to generate invoices and send reminders on the due date. This can simplify the payment process and achieve transparency.
Small businesses must be paid promptly to avoid financial difficulties. Late payment can lead to a significant loss in revenue and can undermine the trust and relationship between businesses. Therefore, it is essential that businesses establish and communicate clear payment terms from the outset. Payment systems should be automated to eliminate reminders and to ensure timely payment. With the right approach, small businesses can continue functioning and avoid the impact of late payments.