What should SMEs do when the customer paying them late is a fellow SME?

A study of how the UK’s small businesses were impacted by COVID-19 and other economic challenges in 2020 was recently published in a joint study by payments authority Pay.UK and the Chartered Institute of Credit Management (CICM).

Some of the findings were predictable, though no less appalling: 51% of all of the country’s smaller businesses suffered from late payment, facing a collective debt burden of £17.5 billion.

They are also spending money to collect on these late payments — 18% of businesses owed money by customers spent over £500 per month chasing payments in 2020. Meanwhile, 75% of those experiencing late payments receive these payments a month or more over agreed terms, and 27% wait over two months.

One finding from this research stood out to us: more than three quarters of the outstanding private sector debt (£8.3bn) is owed by one SME to another. In other words, while large corporations paying smaller suppliers late are definitely an issue, SMEs contracting with other SMEs aren’t behaving perfectly either.

Sue Chapple, Chief Executive of the CICM, advises: “Small businesses can take action to reduce late payment volumes by invoicing correctly and on time and adhering to any specific requirements their customers may have (e.g a Purchase Order number) to ensure they do not fall foul of a simple process or risk their invoice being in dispute.”

That’s pretty much in line with what we believe at RIABU — namely that when a company gets paid late, it is usually because of something it did not do or should have done differently. Changing one’s own internal processes is the first step, and that includes the way one engages with a customer who pays late.

That is as important when you're dealing with a large company as when the customer in question is an SME. While it is usually true that an SME is working with far less cash flow than a large company, SMEs that are still trading will be paying some suppliers. If your invoicing processes and customer relationship management are in order, you will ensure that you are one of the suppliers who are getting paid. 

When dealing with an SME customer, a fellow SME can also initiate conversations about best practices in invoicing methodologies and processes, ideally at a senior level. This can help to kickstart an ecosystem of likeminded SMEs that prioritise developing good invoicing practices as a core competency. SMEs that learn together in this way can grow together. 

If what you're dealing with is an SME customer who is facing insolvency, on the other hand, having good customer relationship management processes in place will also help you to detect warning signs early. For instance, your sales team will have a good sense of whether a troubled company is paying other suppliers by keeping their ear to the ground. In such cases, you may have to decide whether to cut your losses early to reduce risk, or to put a reducing balance arrangement in place while sharing your own best practices, in the hope that their situation will improve and all your payments will be made good over time. 

Get more tips on effective cash flow management from our book, Let The Cash Flow. To find out more about how RIABU helps small businesses get paid on time, visit Riabu.com