The government has indicated that it will take new measures to support small businesses and the self-employed by cracking down on late payments, which cost small businesses £22,000 a year on average and lead to 50,000 business closures a year. The government intends to consult on new laws to hold larger businesses to account, as well as to introduce new legislation requiring all large businesses to include payment reporting in their annual reports.
A new Fair Payment Code has also been announced. This will replace the old Prompt Payment Code and will be open to signatories this autumn. Businesses will need to prove they have met appropriate payment standards before being awarded their official status, and businesses that pay faster more often will be awarded a higher status.
We’ve set out below some ways in which you can minimise the risk of late payments to your business, as well as what steps you can take to recover late payments without going to court.
How can I minimise the risk that customers will not pay me on time?
Before entering into an agreement with a client or customer and agreeing payment terms with them, there are various steps that you can take if you want to avoid problems with non-payment later on. What is best for you will largely depend on the nature of the agreement and the relative importance of each customer or client to your business. The greater their importance to your business’s cash flow, the more vigilant you should be, but remember that simply because your prospective client has the ability to pay you on time does not necessarily mean that they will in practice.
Consider the following:
1. Establish systems and procedures for collecting payments
Good systems are essential to stop late payments before they become a problem and to allow you to easily track how much you are owed.
You may wish to consider things like:
- A cash management system to keep track of what you are owed;
- Issuing prompt and regular invoices;
- Stating the payment due date clearly on your invoices, including any relevant credit period (see VAT invoicing for guidance on what other information should be included on your invoices and Non-VAT invoice or VAT invoice for templates);
- Asking for a deposit or some other payment to be made up front to reduce the burden of late payment;
- Offering rewards in your terms and conditions for early payment (eg discounts) or punishing late payment (eg by charging interest);
- Requesting a guarantee from a more established parent company if you find that you are dealing with a shell company or a company with limited assets; and/or
- Looking out for warning signs and staying aware of changes in your client’s business that could affect its ability to pay you (eg they are beginning to pay later and later, or they are becoming more difficult to contact regarding payment).
Don’t forget that when you are storing your clients’ or customers’ financial information, you need to ensure that you comply with your data protection obligations. See The rules about storing data for how to comply with the law when storing customer data.
2. Check the financial health of new clients
If you do not do this already, you can build a few simple checks into your client due diligence to help you spot issues before they arise.
For example, you can check the Companies House register to get an idea of a company’s financial wellbeing. Be wary if you see that the company has few assets, was recently incorporated or has experienced insolvency issues in the past. This will help you to avoid problems such as contracting with a brand new shell company (which will usually have no, or very few, assets of its own), set up only to deal with and make payments to you. If you are concerned, you can ask for a guarantee from its more established parent company or even a personal guarantee from a director or other individual in case the new company fails to pay.
You could also buy a credit report on a company or individual from a credit reference agency, which will usually charge a small fee for a single credit report. If you are dealing with an individual, you could search for your debtor’s name in the Gazette’s online search function to find if there are any insolvency notices about them, eg if they have been made bankrupt.
A client’s poor financial health does not mean you should avoid them, but it might prompt you to take more precautionary steps to protect your interests.
3. Check clients’ payment practices
Even financially healthy clients can have a history of poor payment practices.
Large businesses have an obligation to publish information about their payment practices on the government’s payment practices website, which includes information about the average time those businesses take to pay their invoices. As part of the government’s crackdown on late payments, it’s likely that more information on businesses’ payment practices will become available.
If your customers and clients are smaller businesses or individuals there is not much you can do to find out if they have a history of late payments. There are some voluntary codes of conduct. For example, you could check whether your customer or client has signed up to the Prompt Payment Code, which commits signatories to paying their suppliers on time, with a target of paying 95% of all invoices within 60 days and 95% of invoices to small suppliers (those with less than 50 employees) within 30 days. You can check the searchable list of businesses that have signed up on the Prompt Payment Code’s website.
You could also look for recommendations and reports by others who have dealt with your prospective client in the past, eg through a general search online, although be wary of references that the customer chooses to send you themselves.
What steps can I take to recover a late payment without going to court?
Once a payment becomes late, you should immediately take steps to chase your debtor. See here a suggested timeline for chasing payment of unpaid invoices: Debt collection timeline. This timeline is included, along with a how-to guide and all the documents you need, in our Debt collection toolkit.
The steps you take to chase payment of an invoice are ultimately a commercial decision for your business, but the below is a suggested cost-effective course of action to take before considering taking your debtor to court.
1. Make immediate contact
Find out why there has been a delay. Be polite and professional but make it clear that you expect payment within a certain time frame, and follow up with a further phone call or email if a specific time frame is agreed and payment is still not received. Follow up any phone calls with an email or letter confirming what was said. It is important to have a written record of your correspondence where possible.
2. Send chasing letters
The below is a suggested timeline for escalation:
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- If your invoice remains unpaid five days after it has become late, send First letter chasing payment;
- If your invoice remains unpaid 15 days after it has become late, send Second letter chasing payment, explaining that if payment is not received promptly, you may charge interest on the debt and/or apply a late payment charge (see our Q&A for more information about when you can add interest and late payment charges); and
- If your invoice remains unpaid 30 days after it has become late, send Final letter chasing payment, explaining that if payment is not received, you will apply interest and other debt recovery charges (if appropriate) and will take further debt recovery action.
3. Formally escalate your debt recovery actions
Consider the impact of taking formal action against a customer on your ongoing business relationship with them, and any cost implications of that. Weigh up whether the costs and time involved in escalating your debt recovery actions are worth your while or whether you would be better placed to simply write off the debt. Your main options for escalating the debt without going to court include using a debt collection agency or lawyer, going to an alternative dispute resolution, sending a statutory demand, or selling the debt. You can find more guidance on each option in our Q&A. You can also find a how-to guide and all the relevant documents you need in our Debt collection toolkit.
The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.