Poor payers can seriously impact on your company's cash flowSmall businesses have been some of the hardest hit in the recession, struggling from a lack of available finance and unstable cash flow.  Last month the Federation of Small Businesses revealed that small firms are often waiting up to four months for invoices to be paid.

Keeping cash flow going in our current economy is key, so small businesses that are afraid to play hard ball with late paying clients run the risk of becoming victims of the recession.

The threat of incurring monetary penalties on unpaid bills is often the best incentive to persuade business clients to pay.  Businesses have a legal right to claim interest from late-paying business customers, but not individuals. Until the end of the year, businesses have a statutory right to charge an additional 8.5% in interest on top of unpaid bills.

The statutory right to charge late-paying business customers interest applies to contracts which do not already include their own arrangements for 'substantial' interest. If there is no agreed credit period in the terms of business, the law sets a default period of 30 days. Interest can be charged 30 days after goods are delivered, the service is provided, or after the purchaser is notified of the amount of the debt - whichever happened latest.

Although you do have a legal right to enforce your debt and add interest, this can have a negative effect on the relationship with your client.  For one off jobs this may not be such a big issue, but for clients you want to keep, this can have a detrimental effect in the long term.  Often late-payment is a direct result of unclear payment guidelines, or not understanding the way a client’s accounts department works (normally they are a very different beast to your day–to-day contact).

Charging interest should be considered as a last resort- by following the guidelines below, the instances of getting into this situation can be significantly reduced:

• Agree all the fees upfront before starting any work
• Encourage customers to pay a deposit in advance of any work being completed
• Ensure your terms and conditions- especially the payment terms- are understood by the customer before work is started
• If credit is given, before deciding on the amount of credit, checks should be made on the credit history of the client using a credit reference agency
• Consider using a credit insurer to insure any potential bad debt, credit insurers will also help in deciding the level of credit given
• Issue clear invoices promptly after the work has been completed and statements at the end of each month.  Many customers pay when they receive a statement rather than an invoice
• Consider using discounts and incentives to encourage prompt payment
• Keep in touch with the customer and use a credit control system so that you can instantly see who owes you money - and don’t be afraid to follow up any promises of payment that are not fulfilled
• And finally, chasing payment can be very time consuming - if you aren’t having any success then you can always enlist the help of a professional in this field so that you can get on with running your business.

This advice has been prepared by Jo-Ann Westlake, the TaxAssist accountant for Exeter. For more information on how to effectively chase payment from your customers, speak to your local TaxAssist accountant.