Late payments threaten small business

Almost 2.4 million small businesses across the UK suffer from cash flow problems as a result of delayed payments, forcing over 670,000 to take legal action in the last five years.

Legal action

According to new research from Bank of Scotland Business Banking, three out of five (60 per cent) of the UK's 3.95 million small businesses have experienced cash flow problems caused by customer late payment. One in six (17 per cent) owner-managers has also taken legal action against a customer for non-payment.

Of those businesses, over a third (36 per cent) pursued payment through the Small Claims Court and a fifth (19 per cent) did so through County or High Court action. Almost a quarter (23 per cent) resorted to legal letters while 14 per cent employed a debt collector.

Given that almost half of small businesses have waited up to a year for at least one payment, it is perhaps not surprising that late payment can dent the profitability and even survival of small businesses. Small businesses must wait 42 days on average before their bills are paid.

Invoicing

When it comes to issuing their own bills, however, small businesses appear to be much slicker. Almost half issue an invoice within just two days of providing goods or services with a further 42 per cent doing so within a month. Just two per cent of those surveyed took over a month to issue an invoice.

Small businesses also claim to be quicker than their customers at settling invoices. Two-thirds pay, on average, in less than a month while a further quarter do so within 60 days. Just four of the 503 small businesses surveyed admitted to taking an average of over 90 days to settle their bills. Nevertheless, one in eight (13 per cent) small businesses admit to taking longer to pay invoices than they did a year ago.

Kevin Gillett, Head of Bank of Scotland Business Banking, said: "Maintaining business liquidity can be a difficult balancing act for many small businesses and a feat which is not helped when late payment tips the cash flow scales. The fact that so many are being forced to take legal action shows just how serious this matter is for business survival."

According to Bank of Scotland, small businesses could help avoid debt problems by following these practical steps:

• Always examine a new customer's credit history and avoid dealing with those who appear to have a chequered past.
  
• Chase up any payment as soon as the first payment becomes overdue.
  
• Consider employing a professional credit controller to reduce overdue debt.
  
• Speak to your business banking manager for some expert advice.
  
• Most banks offer a range of cash flow finance options from overdrafts to factoring and invoice discounting which may help ease the strain of late payment.
  
• Charge interest on overdue payments as a last resort.