LFR on the Money: Take interest in deterring late paying customers

This latest LFR ‘On the Money’ feature looks at how businesses can deter the late payment of invoices.  With businesses across the country continuing to struggle with late paying customers, Alex Hilton-Baird, Managing Director of Hilton-Baird Collection Services, explains that many could be doing more to protect themselves.

"Late payment remains the scourge of business owners and is often their primary cash flow concern in the current climate. As a consequence, many agonise over the credit management strategies they should be employing in order to get paid on time.

One major challenge is the time and money that some processes can consume. Can a business afford to credit check each new customer? Should they really refuse making the next sale because of a couple of missed payments in the past? Is credit insurance really worthwhile?

Hilton-Baird Collection Services’ most recent Late Payment Survey highlighted this dilemma, with fewer than half using credit checks and suspending work and services at the end of 2011.

But a more surprising figure that came out of the research was that only one in five charge late payment interest when an invoice exceeds credit terms. Whether it’s due to a lack of awareness or a conscious decision not to, it would appear that the majority is missing out on one of the most useful and easiest-to-implement credit management strategies in the book.

A proactive stance

The UK was one of the first countries to crack down on late payment when it introduced the Late Payment of Commercial Debts (Interest) Act in 1998. The statute initially enabled small businesses to claim interest for late payment from large businesses with 50 or more employees.

The Act was then extended in 2000 and 2002 to allow businesses to charge interest on any debt that exceeds credit terms. Interest of 8% plus the Bank of England base rate can be levied once it falls overdue, in addition to compensation of at least £40, depending on the value of the debt.

This therefore not only helps to offset the financial impact late payment can have on a business, but it can also serve as a useful deterrent to prevent customers from delaying payment.

Enforcement

One possible reason for this oversight is the fear of losing customers. Would charging late payment interest upset the customer enough to discourage them from placing repeat business?

Crucially, however, businesses have the option to decide whether these charges are enforced. Simply referencing the statute in the terms and conditions of sale and the invoice itself should at the very least make the customer think twice about prolonging payment. If the invoice is still not settled on time, a decision can then be made as to whether the charges are added to the invoice total.

It can additionally be a useful bargaining tool in the chasing process once the invoice becomes overdue, for instance by informing the customer that the charges will be applied should the invoice reach a certain age.

There are several online tools that will provide an instant indication as to how much businesses could claim in statutory interest, and we would urge businesses to consider every credit management strategy at their disposal in order to best safeguard their cash flow."

About Alex Hilton-Baird:  Alex Hilton-Baird is Managing Director of Hilton-Baird Collection Services, which is part of the Hilton-Baird Group of companies. Established in 2001, Hilton-Baird Collection Services provides award-winning outsourced debt collection services to the UK's SME and corporate markets, as well as some of the most respected invoice financiers, leading banks and insolvency practitioners.

Hilton-Baird Collection Services was voted Commercial Debt Collection Agency of the Year in 2008, 2010 and 2011 by Credit Today magazine. In addition, two of its employees have been awarded the Commercial Collector of the Year title, with Team Leader, Charlotte Christie, winning in 2010 and Senior Collections Advisor, Peter Hepburn, winning in 2012.

Find out more about Hilton-Baird Collection Services’ range of debt collection services at www.hiltonbaird.co.uk/CS.

For more information, please contact:
Alex Hilton-Baird
Managing Director, Hilton-Baird Collection Services
Tel: 0800 9774848
Email: LFRCollections@hiltonbaird.co.uk