Late payment – or worse, non-payment – is the bane of start-ups and small firms. According to the latest BACS survey, small and medium-sized businesses are currently owed a staggering £35 billion in late payments, equal to an average of £45,000 per firm.

Not surprisingly thousands of firm fail every year as a direct consequence of being paid late for work done or products provided. The good news is there are several steps you can take to ensure that you get paid on time.

1. Invoice properly

The best way to ensure you get paid promptly is to send the invoice on time to the right person at the right place, and make sure it contains all the details which are needed to get it through their payment system ie may sure to include VAT if applicable. You may need to include a particular reference number, for example. If in doubt, ring and check. A large firm will have many invoices to process, and if you don’t get things right, your invoice will be left to languish at the bottom of the pile. If delayed invoices are a constant problem or supplier terms are long you could also consider invoice financing to get paid faster.

2. Credit check your customers

A credit check will look at their financial position and see whether they have failed to pay others in the past, amongst other things. Some high street and commercial banks now offer a limited credit checking service for their customers – ask yours what they can offer you. You can also ask a credit-checking agency such as Experian or Equifax for a credit check report (which usually includes trade references and information on any county court judgments against a company).

You can also do some credit checking yourself – ask the customer for a copy of its latest filed accounts and up-to-date management accounts. Ask also for trade references which you can call to check if the customer pays on time and is easy to deal with. You could also speak to the trade association which represents your customer’s industry. Sometimes it may be willing to tell you if a company is bad news.

A word of warning too: beware of new clients who suddenly give you a big order – it may be that they have been refused credit by their regular suppliers. So ask around your industry contacts to find out the real story, and if in doubt refuse to take the order unless they agree to pay upfront.

3. Switch to direct debit

Direct debit is a small firm’s best friend because once your customer has signed up to it, it allows you to take the money directly out of their bank account as soon as an invoice is due. And if there are regular recurring payments owed it will deal with those too without you having to invoice and chase each time. Encourage customers to sign up to direct debit by offering a small discount, say 5%, on their bill or some other incentive.

4. Chase all payments promptly

Contact the customer a few days before the bill is due to remind them it needs paying, and then ring them the day it is due, and then continue to ring them until it is paid. Small businesses are often squeamish about ringing people up to ask them for money, especially if it is someone they have a good working relationship with. But you must protect your enterprise.

If phone calls do not get you anywhere, a formal letter on headed notepaper — from your firm’s credit control department or from a commercial solicitor – often produces results. This is called a letter before action and gives the customer a last chance to pay before things get serious.

5. Court action

This should not be embarked on lightly as it will involve time, effort and money and will be a distraction from running the business. Also, you should never begin court action for non-payment unless you are sure the other side has the money to pay. If there is any suggestion of them facing insolvency or bankruptcy, forget it.

You also need to be aware that even if the court finds in your favour, it will not pursue the money for you. It is up to you to do that and, if the other side still refuses to pay, you could find yourself no better off — or back in court.

If you are owed less than £5,000, you can usually go through the small claims track of your local county court — commonly, if mistakenly, referred to as the small claims court. You can make a claim via your local court or online at moneyclaim.gov.uk. You must pay a small fee to start a claim, which varies according to the size of the unpaid bill.

For unpaid bills between £5,000 and £25,000, claims must typically be issued in a county court, while for claims of more than £25,000 there is also the option of going through the High Court. A solicitor is useful for both these routes. In Scotland, small claims are dealt with by the sheriff court. More details are available on the Scottish court’s website.

Once you have lodged your claim, the customer has two weeks to respond. Given this last chance, it may finally pay up to avoid going to court. If it continues to dispute the claim, however, a hearing will be held at which each side will present their case to a judge. In some cases, even though it may go against every natural instinct and feel extremely unfair, the wisest thing may be to write off the outstanding payment. Particularly for small amounts, you need to think very carefully about whether the money you stand to gain is worth all the distraction and disruption to your business.

Top tip

In the small print on your invoice include a line saying that you are entitled to charge customers interest on late payments at a certain percentage above bank rate, under the Late Payment of Commercial Debts (Interest) Act. Often simply reminding customers you can charge this will encourage them to pay up.

Case Study

Susan Hallam is the founder of Hallam Internet in Nottingham, a marketing services firm. To reduce late payments, she has recently hired a bookkeeper who comes in two days a month to chase and get paid unpaid invoices. “She is my terrier on the telephone,” said Hallam, “I wish I had done it previously. It brings money into our account the day after she starts chasing them. She is worth every penny.”

With the help of an adviser, Hallam has also created a spreadsheet giving her a weekly snapshot of the cash coming in and going out. She also credit checks every potential client. She says: “The biggest difference is I can now sleep at night. I know exactly where I stand.”