Late payments are estimated to cost SMEs on average £22,000 annually and result in a staggering 56 million hours of lost productivity.
Here, Sue Drummond summarises the new code and includes her practical tips for small businesses to protect from late payments.
New fair payment code launched
The new code has replaced the previous Prompt Payment Code and is open to businesses of any size, Community Interest Companies, Business Representative Organisations, Charities, Co-operatives and Universities.
The code introduces a gold, silver, and bronze system that smaller firms can use to identify business partners who have made themselves accountable to pay fairly and within certain time limits.
The three award tiers have the following requirements:
- Gold award: for businesses paying at least 95% of all invoices within 30 days.
- Silver award: for businesses paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days.
- Bronze award: for businesses paying at least 95% of invoices within 60 days.
Once granted, the awards last for two years before businesses must reapply. During this time, businesses also agree to abide by the principles in the Code of being “Clear, Fair and Collaborative” with their suppliers and there is expected to be a more robust approach to enforcement also.
How can the new code benefit your business?
If you are aiming for a bronze, silver or gold award under the new code, it will provide your suppliers with confidence that you will make prompt and timely payments. Particularly in industries where supplies are limited or demand is high, it may help to put you in a good buying position.
The new code will also shine a light on compliant businesses – so it will be easier to judge the payment credentials when taking on new clients or making supplies, and also to negotiate faster payments.
How to apply
If you wish to apply one of the tiered Awards under the new code, an expression of interest form must be submitted to the Office of the Small Business Commissioner (the OSBC). You will then receive an application form and guidance on the necessary evidence that should accompany your application. Briefly, this evidence includes:
- proof of UK registered address;
- your standard contract terms;
- two references from suppliers; and
- evidence of payment performance.
You can complete the expression of interest form here or read further FAQs here, both are links to the Office of the Small Business Commissioner website.
Practical tips to protect from late payments
As well as the new code of practice, below I have highlighted further ways that businesses can protect from the risk of late payments:
- Review your invoicing terms: Be proactive and make sure your payment terms are clear and work for your business. Make sure that these are included in your contracts and invoices. Have you considered tightening your payment deadlines? For example, moving from 60 to 30 day terms can help to improve your cashflow.
- Review your credit control procedures: Don’t wait until an invoice is overdue to follow up. Sending polite reminders a week before the due date and chasing them promptly if payment is late can help.
- Check your payment systems: Switching to digital invoicing and payment systems can make it easier for your clients to pay on time and for you to track payments more efficiently. Research shows that electronic invoicing can reduce late payments by up to 20% and many accounting systems such as Xero, QuickBooks and Sage have in-built credit control features that are easily activated.
- Consider factoring or invoice financing: If late payments are impacting your cash flow, you could consider invoice financing or factoring services. These allow you to borrow against unpaid invoices, so that you get the cash upfront. However, these services do come at a cost, so you should review the benefits and drawbacks.
- Consider incentives for early payment: While offering discounts to customers who pay early might reduce your profit margin slightly, it can be worthwhile to avoid the costs and stress of late payments, and as an alternative to factoring.
- Build strong relationships with clients: Maintaining strong relationships with your clients can sometimes help avoid late payments. Regular check-ins and updates on the status of payments can prevent issues before they arise.
Advice for your business
If your businesses is suffering from poor cashflow or late payments are causing issues please contact our team for advice tailored for your business.
Sue brings over 35 years of experience in accountancy and business advisory services.