Late Payment: Make sure your customers know your terms – don’t assume they’ll read the contract!
Late Payment – Make sure your customer knows your terms
Minimise the impact of late payment on your business
Late payment remains a huge issue for many small businesses, says Darren Fell, founder and managing director of online accountancy firm Crunch. “At any time there’s something like £40-50 billion owed to small firms and many businesses that would otherwise succeed fail because they can’t get their customers to pay up fast enough.”
The effects of late payment range from mild inconvenience to catastrophe. “A business that manages its cash flow well would probably see an overdue payment as something that creates some extra administrative work. But a business that does much of its work for one customer could go bankrupt if a big invoice isn’t paid on time.”
When it comes to preventing late payment, it’s important to have a good working relationship with your client, advises Darren. “You know their expectations about the work you’re doing and they should know yours when it comes to payment. Establishing firm ground rules is a wise idea – payment terms should be explained in a contract and agreed by the customer.”
Managing your cash flow is essential, Darren stresses. “You need to know how much cash you have; what payments are coming up and what money you have coming in. That way, if an invoice is late, you can assess its impact.”
There are other ways to keep the cash flowing, he says. “For regular contracts, it’s worth setting up a direct debit with your clients to ensure payment each month.” Invoice finance is another option. Darren explains: “Providers buy your invoices for less than their value and collect payments, but this can help to prevent cash flow problems,” says Darren.
Most small-business owners need to chase payment from time to time. “Picking up the phone is a really underrated credit control tool,” Darren argues. “If an invoice hasn’t been paid and your emails are being ignored you should absolutely get on the phone. If your customer has a legitimate reason for not being able to pay, suggest a payment plan which helps both parties.”
Sometimes you just have to get tough, Darren confesses. “Legally, you can start charging statutory interest (currently 8 per cent of the invoice value plus the Bank of England base rate for business to business transactions) 30 days after your invoice date. You can do this even if it’s not stated in your contract or terms and conditions, and this is something you should consider. After all, 30-day payment terms amounts to 30 days of interest-free credit. Often just the mention of interest payments will get things moving.”
Once you have exhausted all other avenues and still haven’t been paid, it is time to involve a third party, advises Darren. “This needn’t be a lawyer. A reputable debt-collection firm is usually your best bet. Due to a change in the law, debt collection firms can now charge their fee to the debtor, so involving a debt collection firm might not cost you a penny.”
Avoiding late payment – the 6 golden rules
1 Draw up a contract with payment terms and details of how you deal with late payments.
2 Make sure your customers know your terms – don’t assume they’ll read the contract.
3 Get your invoices out on time.
4 Remind the customer as the payment date approaches.
5 If the money isn’t paid on due day, telephone the customer to seek payment.
6 If all else fails, don’t be afraid to take legal action.