The 2 Biggest Risks in Credit Control: Late Payment and No Payment

Introduction - Risks in Credit Control

In construction and engineering, cash flow is the lifeblood of the business. Yet too often, directors underestimate the damage caused by weak credit control. The two biggest risks? Late payment and no payment at all.

Together, these can stall projects, strain supplier relationships, and even push profitable firms into financial distress. Many SMEs assume these are just “part of the job,” but with the right controls, they can be reduced significantly.

At Jones Financial Accounts (JFA), we help SMEs strengthen their credit control systems so directors stay in control of cash, not at the mercy of clients.

The Risk of Late Payment

In construction and engineering, this is often due to long approval processes, disputed invoices, or stage payments being delayed. While one late payment may not seem disastrous, repeated delays can cripple cash flow.

A business might have £500k of turnover “on paper,” but if £200k of that is tied up in unpaid invoices, the company could struggle to cover payroll or supplier bills.

For SMEs, late payments hurt more than for large corporates because cash reserves are smaller. Directors are forced to use overdrafts, inject personal funds, or delay their own supplier payments, which damages reputation and credit ratings. Late payment is not just an inconvenience; it’s a serious threat to financial health.

Impact of Late Payment

Strong credit control ensures invoices are raised promptly, chased regularly, and backed by contracts with clear terms. Businesses with effective systems reduce average debtor days (time taken to get paid) from 60+ to under 40. That extra 20 days can free up significant working capital.

Ignoring late payments results in longer debtor days, higher borrowing costs, and unnecessary stress. Even profitable projects can become loss-making if cash is stuck in client accounts. For SMEs, one slow-paying client can throw the whole business off balance.

Strategy to Reduce Late Payment

1. Set clear terms upfront. Contracts should include payment timelines, interest for late payment, and staged invoicing.

   
   

2. Invoice promptly and accurately. Errors cause disputes, which delay approval.

   
   

3. Monitor debtor days. If your average rises, take action immediately

   
   

4. Use technology. Automated reminders through accounting software keep clients accountable.

   
   

5. Escalate early. Don’t wait months, chase overdue invoices after 7–10 days.

   
   

By taking a disciplined approach, SMEs can prevent cash flow bottlenecks and strengthen trust with suppliers by paying them on time.

Real Numbers: Late Payment

A £1.2m-turnover contractor had average debtor days of 75, meaning nearly £250k was always outstanding. After implementing clear credit terms and weekly follow-ups, debtor days dropped to 42. This freed up over £100k of working capital, reducing reliance on a costly overdraft.

The Risk of No Payment (Bad Debt)

No payment, often called bad debt, is when an invoice is never paid. In construction and engineering, this could happen because of client insolvency, contract disputes, or poor documentation.

For SMEs, bad debts are particularly damaging. Unlike late payments, the cash never arrives, which means you’ve already paid staff, suppliers, and VAT on revenue that never materialised.

Even a single bad debt can have a huge impact. If a company with £200k annual profit loses £50k to a bad debt, that’s 25% of its profit gone. It may take months of additional work just to recover the loss.

Impact of No Payment

Strong vetting of clients, well-drafted contracts, and proactive monitoring of credit risk keep bad debts to a minimum. Businesses that manage this well may only lose 0.5–1% of turnover to bad debt.

Firms without controls can lose 5% or more of turnover each year. For a £3m-turnover SME, that’s £150k wiped off the bottom line, enough to stall growth plans or force redundancies.

Strategy to Reduce No Payment Risk

1. Credit check new clients. Don’t take on risky contracts without knowing who you’re dealing with.

   
   

2. Get deposits or stage payments. Avoid doing 100% of the work before receiving cash.

   
   

3. Document everything. Signed contracts, proof of work, and variation orders strengthen your legal position.

   
   

4. Use credit insurance. For larger contracts, insurance can protect against client insolvency.

   
   

5. Have a debt recovery process. Know when to escalate to solicitors or agencies.

Real Numbers: No Payment

A lift engineering firm lost £80k when a client went into liquidation. After that, they introduced deposits for all contracts over £50k and ran credit checks on every new client. Within 12 months, they had avoided exposure to another client who later failed, saving £120k in potential losses.

Misconceptions About Credit Control

• “Big clients always pay.” Even large firms can delay or default. Size doesn’t guarantee reliability.

  
  

• “Chasing looks unprofessional.” In reality, strong credit control shows you run a disciplined, trustworthy business.

  
  

• “We can absorb a bad debt.” Few SMEs can. Every pound lost in bad debt is profit wiped away.

Key Takeaways

• Late payment ties up cash, forcing SMEs into debt and stress.

• No payment (bad debt) directly cuts profit and can cripple growth.

• Strong credit control systems reduce both risks and improve cash flow.

• SMEs benefit most from proactive credit control, not reactive firefighting.

At JFA, we help SMEs in construction and engineering build robust credit control systems, protecting cash flow and reducing risk.

Wrapping up today's insights, tomorrow we simplify another accounting challenge.