How to deal with unpaid invoices

Research from Xero, an accountancy software provider, found that small businesses waited an average of 30.6 days to be paid by their customers in September 2022 – this represents the longest payment times for two years. This is a growing problem battled by small businesses, which can push them into serious cash flow difficulty amid a period of slow sales growth due to the energy and cost of living crisis. 

The Federation of Small Business’s 2019 Fair Pay, Fair Play campaign, which called for the end of the late payment epidemic plaguing small businesses across the UK, made real progress in the run-up to the coronavirus pandemic. As a result, the government pledged to strengthen the Prompt Payment Code. 

Under the new reform, companies signed up to the Prompt Payment Code (PPC) are obliged to pay small businesses within 30 days which is half the time outlined in the previous code. The government will spotlight those in breach of the regulation to deter non-compliance.  

Cashflow is the lifeblood of a business, so when funds deplete, this can have a detrimental effect on company finances and operations. Late or missed payments can have serious repercussions for businesses that depend on this cash to pay staff, rent and essential bills. Sharon McDougall, a Scottish Debt Help advisor at Scotland Debt Solutions, explains how businesses can target late payers to recover business debts successfully.  

Payment flexibility – You may negotiate payment plans, extensions, and deferred payments with customers to provide greater flexibility. Although this level of flexibility may draw in customers, it’s essential to recognise where to draw the line before company finances take a severe hit. Valuing loyalty by extending support in bleak times is likely the key for businesses that naturally attract a high percentage of returning customers. 

Payment reminders and demands – Send a reminder to prompt the customer to make payment at the first sign of a late or missed payment. While payment may have slipped the mind of some customers, a proportion could be experiencing financial distress, which could prevent them from making a prompt payment. Reminders can help customers get their financial affairs into order and draws attention to payment terms, such as a payment date or interest for late payment if you choose to charge it. 

If there’s no success from the payment reminder, a final payment demand may be issued, which cites a greater level of urgency and sets out the timeframe for payment, such as seven or ten days. This is typically the last reminder before formal court action is taken, which must be stated in the demand letter.

Court action – If the final demand letter fails to generate a payment, court action may be inevitable in the form of a County Court Judgment. A County Court Judgment is a formal decision made by the court that money is owed. A County Court Judgment explains: 

• how much money is owed
• how to pay (in full or in instalments)
• the deadline for paying
• who to pay

At this stage, the debtor can request a change to the terms of the Judgment or negotiate a payment plan. If the debtor fails to make payment, the debt could be recovered by bailiffs or taken directly in instalments through the debtor’s wages. A County Court Judgment will also remain on their credit file if the total amount is not paid within one month. 

A winding-up petition is often pursued as a last resort if you believe the business is out of cash and, therefore, insolvent. Winding up a business means asking the court for a winding-up order to close the business. During the liquidation process, company creditors will be paid according to a set order, as set out by the Insolvency Act 1986.

If company cash flow is dwindling, this may be your calling to instruct a debt collection expert to get your balance sheet into shape.