Every day, SMEs in the UK confront various challenges, with debt recovery tipping the list. Recent research reveals that UK small businesses are currently owed a staggering £32.1 billion in late payments.
Efficient debt recovery is crucial for maintaining a healthy cash flow and ensuring business sustainability. This blog post aims to guide UK SMEs through the best practices for efficient debt recovery, supported by real-world insights.
1. Establish Clear Credit Policies
The first step to efficient debt recovery is establishing a clear payment policy. This means communicating your payment terms to customers upfront. For example, if you're implementing a 30-day payment term, ensure it is clearly highlighted in both contracts and invoices to promote timely payments.
2. Utilize Technology
Technology plays a pivotal role in debt management. For instance, automated payment reminders can significantly reduce the incidence of late payments. Accounting software like Xero provides functionalities designed to streamline these processes, making it easier for businesses to manage their receivables and keep on top of unpaid invoices.
3. Charge Late Payment Interest
Another method of debt recovery involves charging interest. According to the UK government, you may charge an interest rate of 8% plus the Bank of England's base rate for business-to-business transactions.
Charging interest on late payments can work as a deterrent and prompt your customers to adhere to payment schedules. It also compensates your business in case of a delay. That said, make sure to clearly outline this policy in your terms and conditions to ensure transparency with your customers.
4. Offer Payment Plans
Sometimes you might need to be a bit more flexible when it comes to collecting payments. During challenging economic times, offering payment plans can help in recovering debts without losing valuable clients. However, this approach requires a balance between understanding the debtor's situation and maintaining firm expectations for payment.
5. Legal Preparation
As a last resort, legal action may be necessary. However, it's important to be well-prepared. Document all communications and attempts at debt recovery to build a strong case. Engaging with a solicitor specializing in debt recovery can provide valuable guidance.
That said, you must not forget that going down the legal route can be costly. Therefore, if the amount you are owed is small, this might not be the best option. Thus, you must consider the costs and benefits of legal action.
6. Continuous Education
Lastly, stay updated on legal and financial changes affecting debt recovery. Government initiatives like the Prompt Payment Code in the UK aim to protect SMEs from late payments, demonstrating the importance of being informed about such resources.
The Bottom Line
Efficient debt recovery is integral to the financial health of SMEs. Clear policies, technological support, flexibility, legal readiness, and continuous education form the backbone of effective debt recovery strategies.
At Sanay, we can assist your SME in building financial resilience and ensuring long-term profitability. As an outsourced financial services provider, we specialise in working with growth-oriented companies, guiding them through business decisions, and helping them invest wisely.
Get in touch with our team today.
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