Late payment is the bane of small businesses everywhere - it can even wipe out an otherwise viable enterprise. Here's how to make sure it doesn't happen to you.
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The government seems to be taking late payments to SMEs seriously, with two new initiatives to tackle the issue in the form of a small business conciliation service and the creation of a commissioner role.
Whilst most welcome, it’s critical that these are properly funded and high profile so that small businesses use it to their advantage and large businesses know about it too, in the hope it will deter them from continuing late payment practises.
Late payment is one of the biggest issues affecting small business cash flow and has been responsible for the demise of many a good company. A recent report by Banks Automated Clearing System, (BACS) shows that half of SMEs experience late payments and wait an average of 24 days beyond agreed invoice payment dates. Government estimates are that small firms are owed £26bn in late payments.
"Set terms of payment straight away with your customer and make them very visible on every invoice"
A Liberis survey of 1,000 small businesses has revealed that while 52% of small companies chase late invoices immediately or a week or so after the due date, over quarter only do so if the have time and more than 2 in 10 never chase late payment.
Cash flow is critical to survival, so don’t let customers use you for cheap finance by hanging onto your cash. Here are some actions that all small businesses should take that can help mitigate late payment.
1. Don’t be coy
Don’t be rude either, but have the mindset that you’re entitled to be paid. You’ve done the work or delivered the goods and you’re not their bank or line of credit. Always follow up late payment. Do not let it drift.
2. Set terms and expectations
Set terms of payment straight away with your customer and make them very visible on every invoice. Use bold colours to highlight total amount payable and payment terms. If you intend to penalise for late payment by adding interest, make this clear at the start too and include it on your invoice. Show you mean business from the beginning.
You are entitled to charge ‘statutory interest’ for late payment which is 8% plus the Bank of England base rate for business to business transactions. Current statutory interest for a recent debt would currently be 8.5%.
3. Check your customers out
Run credit checks on new customers. There are speedy online services and it could prevent problems later on. Similarly if you suspect an existing customer may be having problems paying your invoice, check their situation too. You can get in quick then and work out a payment plan.
4. Avoid cheques
Avoid the excuse of the ‘cheque’s in the post’ and get customers to pay using electronic transfer or direct debit.
5. Send reminder invoices that stand out
Let customers know immediately if their account is overdue. Send a statement or reminder after a few days. Use chromology (the psychology of colour) and use red ink on reminder invoices. It’s active and outspoken and commands attention.
For high visibility, have ‘overdue’ stamped right across the page in red and make it clear when you want payment by. It leaves the recipient in no doubt that you’re on to them.
6. Talk, don’t type
If you’re issuing a particularly large invoice, call the client before payment is due to make sure your invoice has been received and if there are any queries. It can pre-empt any delay and puts you front of mind.
Similarly if payment is overdue by a week or more, pick up the phone and explain nicely and calmly that you invoiced 30 days ago. Sometimes having a chat is all it takes. Get a date when the invoice will be paid and call that day to check it is.
If you hate the thought of having a conversation, prepare a script beforehand. Come across firm and not aggressive or apologetic.
Be firm but fair, and don't go over the top
If you’re dealing with an accounts department always get the person’s name and make them your point of contact. Also, get to know their processes. For example, do they only pay on certain days of the month.
Be persistent. Make regular phone calls. Be courteous at all times though.
Also make contact with the person who employed you too. It’s usually the case that they’re horrified you haven’t been paid and will sort it out with the finance department.
7. Contain the situation
If you haven't received payment for goods or services, do not continue to do business with that customer until they pay, even if you think you might lose the contract. They are in the wrong, not you. It might be the leverage you need to get paid.
8. Be flexible if necessary
On large outstanding amounts, it might be necessary to offer flexible payment terms. Regular instalments or splitting a bill into two manageable chunks, may be your best chance of payment.
Paul Mildenstein, CEO of small business funder Liberis