Time to show late payers that you mean business

It is estimated that 10% of small business failures are triggered by late or non-payment of bills

I’M SURE you’ve all heard it before. “The cheque is in the post.” “We seem to have misplaced your invoice, could you send another?” Ironically, my favourite was: “Oh, we’re waiting for the funds to come in from a large customer before we can pay you.”

Late payment of debt is the scourge of the SME, and in the current economic climate is harder to manage than ever before. Growing sales is essential, but a sale isn’t a sale until you have been paid for it. Ultimately, cash is king and managing cash flow is one of the most challenging aspects of growing any business.

According to the latest statistics, outstanding payments owed to SMEs has leapt by £2.6bn to a massive £18.6bn this year. The Bacs late payment map makes for interesting reading; Scotland suffers more than any other area of the UK, apart from Greater London. We currently spend, on average, 2.9 hours a week chasing overdue payments, that’s 20 days annually, while the national average is 2.5 hours a week, 17 days a year.

The average amount outstanding to an SME at any one time is £30,000. Now that’s a particularly alarming figure, especially when you consider that almost a third of those businesses surveyed have warned they could go bust if faced with overdue invoices of up to just £20,000.

The problem is becoming increasingly widespread. The Federation of Small Businesses has estimated that 10% of small business failures are triggered by late or non-payment of bills. Further investigation has revealed some organisations are making smaller firms wait for more than 100 days before paying them, and even changing terms and conditions with little notice.

Step up Alliance Boots. Just one of a number of major organisations wielding its financial strength, the high street chain wrote to its suppliers earlier this year to inform them that bills would be paid up to 75 days from the end of the month of invoice, with a 2.5% settlement fee.

According to the FSB, making small companies wait and then charging them for the privilege of doing so is “outrageous”. Who couldn’t agree? The organisation just last week called on the Prime Minister to ask John Hutton and the Department for Business, Enterprise & Regulatory Reform (BERR) to look into the payment practices of larger companies.

I’m not convinced BERR is actually up for the challenge, however, as it has just pulled the plug on funding for the Better Payment Practice Group – a lobby group with a website ( www.payontime.co.uk) encouraging companies to adhere to a code of practice and pay bills on time.

I visited the site for myself. Some of the advice is sound – there are top tips for encouraging timely payment, such as a discount for early settlement, a prompt payment rebate scheme, and advice on how to establish and agree fair payment terms with your customers at the outset.

But I have to confess I was a little disconcerted at the advice to “Get your attitude right”. So that’s where small businesses are going wrong. It’s their bad attitude that causes big companies to withhold payment. Oh really?

Putting the squeeze on late payers is a rotten job but somebody has to do it. And if you’ve followed all the best advice and still can’t persuade your customer to part with the cash they owe you then there is only one solution; don’t work for them again. The risk to your business is too significant to pussy foot around.

Late payers are like naughty children; they will push you to the limit at every opportunity, then sit back and rub their little hands with glee when you give them yet another final warning. These are tough times. So get tough. Treat them like children. I’m not suggesting for one minute you spank them for every day past the due date, but apply the same psychology as you would to educating a child.

The best ploy with a child is to withdraw something that matters to them. Take away their Wii or deny access to Playhouse Disney on telly and you’ve suddenly got their undivided attention. Do the same with your late-paying customers. Withdraw your product or service from them and don’t give it back until they pay – and promise never to do it again.

It worked for MTa International, a small training business that received the above-mentioned letter from Alliance Boots. The husband and wife team, about to run a training course for the pharmaceuticals retailer, threatened to withdraw their services unless Boots reverted to its original payment terms – just last week, Alliance Boots backed down. A rare David and Goliath victory, but proof that tough action works.

While legislation allows small businesses to charge interest on debts due from large businesses, many are reluctant to do so for fear of losing valuable contracts. We shouldn’t be afraid. If more and more SMEs do it, ultimately big business will have to pay attention. If you lose a customer as a result, they are simply not the kind of company you want to be doing business with.

It’s clearly time to take on the late paying behemoths. In what are tough trading conditions, large companies need to play fair and pay fair. It’s more than just business, there’s a moral issue at stake here too. It’s not right for big business to use their smaller counterparts as a source of interest free loans.

I noticed that the Institute of Credit Management is updating the UK late payment league tables. Wouldn’t you just love to name and shame the tight-fisted swines that cause so much grief to your business? I’ve e-mailed the ICM the details of all the late payers that stifle my cash flow, just in case they are missed out by accident. Might I suggest you do the same?