How tackling late payments can boost your cash flow

Fast payments are the oxygen the UK's small businesses need to thrive and grow. But small suppliers are often at the back of the queue when getting their invoices paid by their bigger customers. Good Business Pays has been leading a nationwide campaign since 2021 to end this problem.

In collaboration with Mastercard's Strive UK programme – which connects small business owners with the right digital technology and skills tailored to their business – Terry Corby, founder and CEO of Good Business Pays, and Philip King, former UK Small Business Commissioner, set out the five things a small business can do to avoid late-payment problems.

What causes problems around payments?

The fastest growth and innovation comes from small businesses. And the best big businesses often look to them to help improve their products and services.

But this model will only work if there is a healthy partnership in place. A partnership in which the small business has a contract and cash-flow arrangement where they can invest in raw materials, technology, people and more. But big businesses don't always understand this.

Five tips to make sure you get paid

(Including Philip King's "Five-Step Model: Business Survival by Getting Paid")

1. Understand the role cash flow plays in your business.

As has often been said: turnover is vanity, profit is sanity, but cash is reality.

The sad truth for businesses of all sizes is that when they run out of cash, they fail. The worry about negative cash flow can cause sleepless nights and lead to mental-health problems. A healthy, well-managed cash flow lets businesses invest in resources and other areas that lead to growth and success.

With that in mind, do the following:

• Build a cash-flow forecast.

• Update it as soon as changes happen or are expected, so your business remains in control.

• React quickly when the unexpected occurs.

2. Know your customer

Understanding the legal status of your customer's business is important. If it's a sole trader, you're effectively trading with a consumer. If it's a partnership, you need to know the names and addresses of all the partners, since they'll all be liable if invoices aren't paid.

Limited companies are stand-alone legal entities. If they don't pay you, there is no recourse to the directors or owners. It's the company that's liable.

If you invoice the customer in the wrong name, you're likely to experience delays. For example, John Smith Ltd would be a completely different entity to John Smith (1956) Ltd. If you have the wrong name, you won't be able to start legal proceedings to recover the debts you're owed.

Keep the following in mind:

• Use the many sources available to check the customer's record of paying their suppliers and their creditworthiness.

• Ask questions to find out how the business is currently doing and how external factors – such as inflation, rising costs or increasing interest rates – are affecting it.

• Get beneath the surface to discover whether its market is shrinking or growing, if it has new products or services in stream, and if it's facing more or less competition.

• Always check that future orders – and payments – come from the same company name.

3. Understand when you'll be paid

Too many small businesses assume a new customer will pay them in 30 days. But if the big business is assuming 90 days, you've got a 60-day gap, which can be a big cash-flow problem.

So, it's important to understand and agree what the terms are upfront. Negotiate, never leave it to chance, and make sure you confirm it in writing. If you do this, both parties will benefit through a better working relationship.

• If the customer demands unreasonably long payment terms, you can push back. Because they want your products or services, you have more power than you might think.

• If they insist on longer payment times, ask for something in return. That might be fewer deliveries, more standardised products, or a longer termination period, for example.

• Always confirm the terms in writing. Agreeing terms that are a win-win makes the relationship more of a partnership than a transactional arrangement.

4. Understand how you'll be paid

Every company has its own way of doing things. Make sure you know them, because all too often businesses will delay paying an invoice because there's something missing. Don't leave this important step to chance or you may be waiting too long to get paid.

• Some companies issue a formal guide to help suppliers, so ask for a copy. If not, ask the right people.

• Find out how the company approves the invoice, who does it, and what route it takes once it's in the system.

• Get introduced to someone in the accounts payable team before you raise your first invoice.

• Make sure you know when their payment runs are and how long their process is to approve. That means you can always invoice in time for their payment run.

5. Where is my money?

This is really where all the work to build a good client relationship and open communication bears fruit. If things start to go wrong and you're waiting to get paid, take action immediately and don't wait.

• For large invoices, or new customers, always call before the due date to check that they've received the invoice, that it's OK, and that they're processing it.

• Make contact on the due date – and not a day later – if you haven't received payment.

• Keep notes of all conversations so you can refer back to them.

• If you don't make quick progress, escalate within the company and then outside by using a debt collection agency or lawyer.

• Never bury your head in the sand and hope for the best. Show them you're serious about getting paid.

Promote prompt payment for your own business

Creating a fast payment culture with your own suppliers will help you become their customer of choice.

Show your suppliers that you support fair and prompt payment with free resources you can download from Good Business Pays.

Relevant resources

• Late payments: Tips to help small businesses get paid on time

• Lunch and Learn: Five ways to optimise your billing and get paid on time

• Lunch and Learn: Invoicing 101 – How to invoice and get paid faster