Late payment has become an increasing and very serious issue in the UK, with a revealing study revealing that on a national level, small and medium businesses suffered a £55 billion loss due to late payment of commercial debts. So with excuses mounting by the second, what practical measures can you take to make sure you get paid on time?
Sign your customers up
Make sure your company has signed contracts with all customers, and that these contracts clearly state your payment terms. These terms should also be clearly described on your application forms and the invoices you send out. Be sure they know what the credit terms are, whether you offer discounts for prompt payments or bulk purchases, whether additional costs are payable (e.g. VAT or carriage costs), and whether you charge interest on overdue accounts. Remember that all businesses are legally entitled to charge interest on late payments.
Credit Check your potential client
A company credit report from a recognised credit reference agency collects trade payment information on how large companies pay their bills. Even if your potential client provides you with references, they may have been created to cast the client in a positive light. They may also present you with a great looking set of accounts, but this cannot be used to determine whether you will get paid on time. The same goes for a healthy looking balance sheet, which may only demonstrate their proficiency in getting their suppliers to finance their business.
Setting a credit limit for each new client is a good place to start. Don’t allow customers to exceed limits without your permission. If you have already assessed the creditworthiness of the customer, you will already know how much your business can afford to wait for (or lose) should the worst scenario occur.
Purchase order requirements
Large companies often require signed purchase orders before paying invoices. This forms part of their internal control procedures. As such, it is important to ask the manager or department placing the order whether they need to raise an internal P.O. If this is the case, then you need to check whether they have done so covering the value of the order. Always ask for a copy of the P.O. It is also worth noting that some large companies require invoices from suppliers to quote the P.O. number before they are paid.
Excuses for late payment
Plan ahead to avoid potential excuses for late payment. Companies will use a whole host of ploys to buy more time. Ensure that after you dispatch goods, your customer has A: definitely received them, and B: there are no problems with quantity or quality.
Send statements at different times in the month to your invoices. Sometimes this tactic can provoke questions, particularly when original invoices have been lost, not received, or mislaid.
Check on expected pay date
Confirm with your client when your bill is expected to be paid. Remember to ask whether they have specific cheque run dates.
Chase late payment over the phone
The telephone method is a far better way of chasing money than sending a letter. Some experts in say that phoning is in fact 80% more effective. In addition, you should always prioritise your cash collection activity, making sure you chase the oldest and largest debts first. Be friendly but firm when speaking with them, and don’t forget to remind them that neglecting payments means they have to pay interest.
The value of your product
Remember that your client should have a clear idea of the value of your product, especially if it has been developed to the client’s specifications. If this is the case, then your bargaining power lies in the fact that your product may be a vital part of one of their processes.
Portfolio risk management
Keep track of the news that may affect the creditworthiness of your key clients. Put their names on a low cost monitoring service with a credit reference agency. There is nothing worse than being the last to know when something has happened to one of your key customers.
Building a relationship
Try and establish a personal rapport with one or two people in your client’s Accounts department. This relationship may serve you well when dealing with payments, late or not.