Here, Sue Drummond summarises the new proposals and includes her practical tips for small businesses to protect from late payments right now.
New late payment proposals
The government has unveiled a range of new measures to help small businesses at risk from late payments. The proposals include:
- New laws which will hold larger firms to account on late payment practice and require them to include payment reporting in their annual reports.
- Enforcement will also be stepped up on the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly on GOV.UK. Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.
- A new Fair Payment Code to replace the current Prompt Payment Code, will require businesses to prove that they have high payment standards.
- A consultation on further policy measures to address poor payment practices will also be launched.
If these measures are successful, larger businesses will share similar accountability to public sector bodies for their payment times, by including this as part of their annual reports (in a similar model to CSR and other supply chain reporting initiatives).
What could be in the new Fair Payment Code
The Fair Payment Code is intended to replace the Prompt Payment Code, which is a voluntary code of practice for businesses and has had limited success.
Companies that sign up will need to prove that they have met good payment standards before being awarded official code status under three award categories:
- Gold: for businesses that pay 95 per cent of their suppliers within 30 days.
- Silver: for businesses that pay 95 per cent of their small business suppliers within 30 days and all other suppliers within 60 days.
- Bronze: for businesses that pay 95 per cent of suppliers within 60 days.
When could the new laws be introduced?
The Government has said that new legislation is expected in the ‘coming weeks’ and is expected to release further details shortly, possibly at the forthcoming Budget announcement.
The consultation on plans to bring in further late payment regulations and new Fair Payment Code are expected to be launched this autumn.
Practical tips to handle late payments
As we await the new legislation and code of practice, I have listed below some proactive actions that you can consider immediately to protect your business 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.
Paying your suppliers
Ahead of the new measures coming in, you might also review your own payment processes.
- Do you meet your supplier payment terms and settle invoices and bills on time?
- Do you have processes in place to review and track your performance in paying your suppliers?
This will help you prove your payment standards if you intend on signing up to the new code of practice.
Further updates
We will provide further updates on the new late payment measures as they are confirmed by the Government.
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.