How to Deal with Late Payments As a Small Business

It's inevitable that you'll spend time chasing payment from customers who won't cough up. Read this guide and take what you're owed

How to Deal with Late Payments As a Small Business

It’s a fact that can be a little hard to swallow at times, but there will come a point within your time of owning a business where payments will be late. It starts as business as normal; the brief was set, the work was completed, the invoice was sent – then……nothing. The time has come when you need to chase the payment, but let’s be honest, it’s not the most desirable part of the job – especially for us painted smile and gritted teeth super polite British folk.

A survey conducted last year suggests that the average small to medium businesses in the UK are owed £40,857 in unpaid invoices, with more than 50% of the total being overdue. 1,000 businesses were surveyed, and 23% of them said that these late payments have put them at risk of closing.

Chasing a late payment can be one of the most challenging parts of being a business owner, having to email or phone a client to ask when the money will be paid is never an easy conversation. But you ARE entitled to be paid for the work you have completed; this is business after all.

It has also been reported that these businesses spend 336 hours chasing late payments, that’s the same number of hours as a full time member of staff working for 2 months; for the same amount of time you could do a whole day of team building for a team of 40, or leave early every Friday for a year with a 7 person team. Think of the motivation you could generate!

So, if you have previously experienced this and want to learn how to prevent it, or you are just starting out and want to avoid the situation from day one, here are some tips that will help!

Set clear terms

It is critical that terms of invoicing are established with every client as soon as possible, to prevent any difficult situations from forming further down the line.

If you are unsure about the terms that you should be applying, you could seek advice from other business owners, conduct some internet research or speak to an accountant about your cash flow. Whether you want your invoice paid in 14, 30 or 60 days – make this clear to your client in the initial agreement in writing – even if it is email format.

Graphic designer Lee Mason shares his experience: “I don’t really have a standard process when it comes to late payments, in the past, I’ve threatened to add 10% interest every day it’s late – This usually comes long after the due date though. If I’m a little concerned I won’t be paid in good time I hold onto the final files until the balance is cleared. But it’s a very rare thing where a payment is late, and if it does drag on a daily nagging email usually sorts it out!”

There is a particularly helpful guide from the government about late commercial payments; it comments that the interest you can charge if a client is late paying an invoice is ‘statutory interest’ – 8% in addition to the bank of England base rate – currently 0.25%. So you could effectively charge 8.25% statutory interest of any debt owed to your business.

If you are going to add interest or charges on late payments, be sure to be transparent about this from the beginning.

Look for gaps

Take a look at your cash flow – are there glaring issues? Do your payment terms match up with those of your suppliers?

For instance, if you allow your customers 60 days to pay, but your suppliers stipulate their invoices are paid within 30, you may find yourself turning to your capital reserves to cover the gaps. This is a far from ideal situation and should urge you to amend your payment terms to prevent this practice from becoming the norm.

Some small businesses have a policy of receiving 50% of the invoice before work is started or even full payment when working with new clients for the first time; then once a relationship is established, invoicing after work is completed becomes standard practice.

Do some research

There is a lot to be said for trusting your intuition – or perhaps you have heard that a potential new client can be a stickler for paying within pre-determined payment terms. If this strikes a chord with you, then it’s worth undertaking some research to allow you to make an informed decision.

Having a looking at a business’s Companies House record or performing a credit check will help you seek reassurance or consider how to move forward.

Make payments easy

Work to ensure that there are no barriers in your client’s way and make it as easy as possible for them to pay. Make it very clear that you accept all methods of payment; cheques, BACS or direct debit. Make your bank details extremely clear on your invoices, and make yourself available to the accounts department or accountant.

There is even software that you can implement within your business that includes a ‘pay now’ button on an invoice that is generated and sent digitally;

Jade Winters from DMC Software gives us an example of this: “Sage Pay is a payment solution, which gives users the ability to take payments from customers online, face to face, over the phone and from within invoices.

“It doesn’t generate the invoice; you’d need to be using a compatible accounting solution for that, such as Sage 50. By using Sage Pay integration with your accounting software, you can embed a ‘Pay Now’ button into your electronic invoices, which enables your customers to submit a payment online immediately.”

Turn to automation

One sure fire way to avoid late payments is to use direct debits. Of course, this option won’t be viable to every type of business, but if you offer a service that is ongoing then direct debits can be a blessing! You could even offer a small discount for clients that pay by direct debit – this then becomes the most efficient choice for both parties, and to make it even easier – having the direct debit mandate form on the website for clients to download makes the process even easier.

Will Craig, managing director at Digital Impact gives his thoughts: “My agency cut its teeth in web development, which is inherently quite project-based. Someone wants a website; we build it and they pay for it. It’s a simple model, but it can raise serious cash flow issues. Since project work varies as much as it does, we try and make everything else as consistent as possible.

“For hosting, maintenance, support and marketing contracts, we want to know exactly when we will be paid. Using direct debits means we do know when regular payments will be made. Looking at a calendar, we can pinpoint the day that payments will clear, which really helps minimise cash flow issues.”

If you are able to pinpoint the clients that you repeatedly have problems with, it’s important to reconsider your relationship with them. It simply doesn’t make sense to keep working with them in the hope that they will pay – you are effectively putting your business in jeopardy. By being transparent, honest and exhibiting open and honest communication you will be able to establish reliable and prosperous client relationships.

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