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Late payment: an SME view

Late paymentLate payments are a continuing burden for many businesses and our latest SME Confidence Tracker shows that business are waiting 38 days on average for payment – more than a week longer than figures from Q1 2014 (31 days).

Here we speak to two SMEs to seek their views on late payment, how it has affected their businesses and the measures they have taken to tackle this issue.

John Fowler (JF) is a consultant at UK Fire Doors, which is one of the country’s leading fire door manufacturers. Meanwhile Sam Duong (SD) is CEO of Ming Foods, a Chinese pancake manufacturer based in Kent that exports its products across Europe and the U.S.

How have late payments affected your business?

JF – Late payments are something that we have come to manage effectively over recent years at UK Fire Doors and so their impact on the business is very minimal.

As a business we have invoice discounting and credit insurance which, when combined, take away the potential pain that late payments can cause. Our invoice discounting facility also means that we can be more accommodating with our customers as it gives us the necessary flexibility. There is no doubt that we have late payments on our books, but the invoice discounting facility covers this.

If we didn’t have the facility then we would have to be stricter with our customers in chasing payments and potentially withholding deliveries.

SD – As a business owner, late payments are one of the hidden costs that you have to tackle and try to keep a lid on. Having a structured payment chasing system can help keep a tight lid on credit control.

Enforcing terms with legal letters and ultimately undertaking a small claim in court all cost money but thankfully we’ve not had to take the latter option.

What has been your biggest late payment from a customer?

SD – We have had some challenging late payments from some customers, with one of the largest around £20,000. However, having strong customer relationships is vital to a business like mine and so sometimes these claims are underpinned by an understanding of their circumstances.

Equally we also have to take a long-term commercial decision on growing our business and working with our customers.

JF – At the moment, as a business we have £200k of invoices that are – what I would consider to be – late from our customers. But chasing payments is an art rather than a science. It is about constant monitoring, knowing your customer, the details of the particular project(s) and communicating effectively with the key staff.

We have trusted customers that we know are likely to pay us a few days late.  Providing the debt is insured and the payments, whilst slightly late, are regular, then in most instances we can live with that.  The key is that although late, the payments are regular.  In these cases it is when the customer misses a regular payment date that the alarm bells ring, not when the debt becomes overdue.

It is the customers that are irregular with their payments that take up a lot more of our time, as these need to be monitored more closely and the reasons for the irregular payments understood because it may be down to cashflow issues on their part.

Has growth or investment been affected as a result of late payments?

JF – We have managed to work ourselves into a position where late payments are not holding back the business and we have been able to continue to invest.  The recent opening of a second manufacturing facility at Langley Mill, Nottingham to operate alongside our existing facility in Mold, Flintshire, is a testament to this.

SD – Late payments can impact our business and have at times acted as a brake on our growth and investment ambitions. In the context of the wider banking industry, late payments are only a symptom, although a symptom that does hit businesses further down the chain.

Have things improved in recent years in terms of your customers paying more promptly?

JF – As a business we have worked hard to get our procedures into shape which has made the impact of late payments minimal. In general, the number of debtor days has come down considerably. We are now in a position where the average time taken to pay is less than 60 days.

SD – Overall, we haven’t seen much difference in dealing with late payments with our customers in recent years.

Do you have a person dedicated to chasing late payments from customers?

SD – Late payments are something that we deal with on a regular cycle as invoices fall. A key part is to know your customers and understand which ones are likely to be on time, slightly late or worryingly late. Understanding the context for each of these and working with your customer is key.

Our normal payments term is 30 days but on average our customers will tend to stretch these terms by around 50%.

At Ming Foods we have a small accounts department of two people who spend 10% of their time on chasing payments.

We don’t see this as a negative and time consuming activity though, as it gives us an opportunity to have a conversation with our customers and see how we can work with them more in the future.

JF – While as a business we are comfortable dealing with late payments, it has involved a significant investment of time and money to get on top of it. We have a team of three looking after the finances with our financial controller spending around half his time on debtor control.

To find out how Invoice Finance can unlock cashflow from within your business visit www.bibbyfinancialservice.com.

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