Every business knows that when it comes to payment, no two clients are alike. Some pay almost as soon as your invoice hits their desk, while others favour deadline surfing and leave it to the eleventh hour. And then there are the late payers. Your organisation might have a contingency fund that allows you to absorb this delay, but if you don’t, then late payment will hurt.
Late payment is a serious headache even when business is flourishing. The offering can be spot on and your customers keen, but if cash flow is interrupted you’ll soon be in trouble. It’s contagious too. When a company pays its suppliers late, they are likely to do the same to their suppliers, and so the dominos begin to fall.
The 2015 State of Small Business Report from Wasp Barcode Technologies revealed that 42% of small businesses with 11 – 50 staff cite cash flow as a top five challenge, while 21% say that getting working capital is a major problem.
Research by the London Evening Standard shows that small businesses are collectively owed £16.9 billion, so here are ten steps that you can take to get what’s rightfully yours, when it’s rightfully yours.
It pays to run a credit check on customers, and some of their customers too. It will help you to spot any changes in status or behaviour and will ensure that you can respond proactively to any potential problem.
Do you want to run a credit check? Undertake a free company credit check on a UK company of your choice, to ensure whether the company is credit worthy to fulfil its payment obligations and adhere to prompt payment.
Every good contract will make it very clear when you must be paid. You can add some extra incentive by stipulating a discount for early or on-time payment, and a penalty for late payment.
There are two ways to approach this step, depending on whether you’re a product or a service company. As a supplier of products, it’s a sound idea to request half payment ‘up front’ and the remaining half on delivery. Don’t start working for a customer who hasn’t paid you at the first stage.
If you’re a service-based company, choose a day of the month and invoice on that exact day every time. Be totally consistent and take care to ensure that the amount owed is crystal clear on the invoice.
Surprisingly, only 36% of very small businesses issue invoices via email, relying instead on the old-school paper variety. Move to electronic invoicing and you’ll make it easier and quicker for customers to settle their debts, which will impact equally quickly on your cash flow.
Business thrives when relationships stay positive, so don’t let your connections deteriorate through poor communication. It’s also important to remember that late payment undermines your business, so you really need to find out what’s going on.
Get in touch to find out why payment has missed the deadline, and perhaps offer to call and collect it, discuss a compromise or organise an alternative way to pay. In some cases, customers need a gentle reminder to pay a few days before the due date – don’t be reticent about maintaining a dialogue with organisations that owe you money!
When late payment has become very late payment, you can create a carefully worded series of collection letters, at 30, 60 and 90 days for example. Each letter should be more strongly worded than the last, and this is where a legal professional can be very helpful. They will be best qualified to set out the consequences of your customer’s late payment behaviour.
Debt collection sounds like a last-resort step and some corners of the industry have a dubious reputation, but there are credible, professional agencies that can settle your outstanding payments without compromising the all-important customer relationship. It’s worth thinking seriously about any customer who has kept you waiting for payment this long: do you really want or need their business?
The more you can see, the better you’ll understand. Gain a clear and complete overview of incoming and outgoing money. Now you’ll be able to forecast more accurately and will know exactly when to start pursuing late payers.
More often than not, it’s large enterprise customers who are guilty of withholding due payment. Their inflexible terms are designed to protect their own cash flow, not yours. To tempt them out of bad habits, consider adding penalties or interest to outstanding debts or offer Dynamic Discounting – early payment incentives on invoices awaiting payment.
Sometimes late payment is simply unavoidable, however many tactics you employ. That’s why it’s a good idea to have an emergency fund safely locked away in a business account that you can use as a buffer whilst the delay is sorted out. It will certainly make this common small business stress factor more manageable.
For more information about how your business can tackle late payment, visit our download centre, where you’ll find guides such as the For Dummies Guide: Understanding Credit Risk. You can also explore some further blog posts, such as: What is credit risk and how do you reduce it?
Do you want to be a savvy credit manager? Download the 'For Dummies Guide: Understanding Credit Risk' to learn how to trade with confidence and make informed decisions about the companies you choose to do business with.