How SMEs can reduce late payment from customers

Every small business, no matter how successful, will encounter a late payer during its time. Whether this is a one-off incident or an ongoing monthly delay, it can leave SMEs struggling with cashflow problems due to the payment gap between products or services delivered, and the invoices actually being paid.

Do late payments affect particular sectors?

Compared with other sectors, SMEs in the construction industry in particular are the most likely to suffer from late payments, according to recent research from R3. This is largely due to the unstable payment supply chain, where no one individual or business will be paid until the first person in the chain is. An end customer will hire a large construction firm to do a job, who in turn will hire several independents for different elements e.g. plumbing, electrics, and these independents will also hire other third parties, extending the chain even further.

Each of these different parties require payment, but the funds leave the end customer, go through the large construction firm and the first round of SMEs, before the even smaller businesses in the supply chain, such as those only employed for one or two days on a larger job, can be paid. Small businesses in this industry on average wait 90 days to be paid, a number which can be much higher in many cases. If some businesses are waiting an entire financial quarter to be paid, it is not surprising that they are suffering from cashflow issues.

What can suffering SMEs do?

It is imperative to state and agree payment terms at the start of any new customer relationship, and ensure this also applied to any new projects undertaken with an existing customer. Payment terms (e.g. 7, 14 or 28 days) must be displayed in large, clear font from the very first invoice sent out.

The next step may seem obvious, but many SMEs fall into the late payments trap by not sending out invoices to customers promptly. In the excitement of working with new customers and starting on new projects, the more administrative tasks such as sending out invoices often get moved down the priority list. In certain industries, this means that any late invoices can become lost in the supply chain, so sending out invoices before the payment is actually due is a vital step.

Once it is clear that an invoice has not been paid on its due date, it is important to action receipt of these funds as soon as possible. SMEs can encourage bad payment habits from their customers by allowing invoices to remain unpaid for days, or even weeks from the original due date. This behaviour will inevitably be to the detriment of a small business, particularly if these payment habits are coming from multiple customers.

When to involve a third party

If weeks, or even months have gone by without payment from a customer, it is time for an SME to look for third party support to alleviate the cashflow problems affecting its business. This third party could be an alternative finance firm to provide the funds themselves in the short term, or a solicitor to demand the invoices owed are repaid. It must also be considered that some alternative finance firms will also chase customers on a business’ behalf, acting as a solution to both problems.

Many SMEs understandably are cautious about upsetting existing and new customers by chasing late payments, but the financial stability of a business must take priority in these scenarios. If a business is able to pre-empt, deal with and prevent late payments, it will undoubtedly have a positive effect on growth and investment, and give the business a bright future ahead.