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  • Writer's pictureDavid Parker

How to deal with late payments as a small business

Overdue payments from customers are a frustrating obstacle to effectively managing your business’ cash flow.

Most business owners will very likely have suffered from the late payment of an invoice at some point. Research by the Federation of Small Businesses shows that a third of payments to small businesses are late with £6,142 the average value of those overdue bills. If small companies were paid on time, the economy could be boosted by around £2.5 billion annually and 50,000 more businesses could be kept open.

Unpaid invoices can have a significant negative impact on cash flow, so what can you do to reduce the chances and impact of late payment?

Research your customer If your customers are other businesses, checking a potential client’s credit history to find out whether they have a record of late or missed payments can highlight any potential problems. You need to convert leads to sustain and grow your operations, but that doesn’t necessarily mean you should agree to do business with anyone who comes through the door. Untrustworthy customers can quickly start costing your business.

State your terms from the outset Agreeing payment terms with your client before you start work for them means you can prepare for this on your cash flow. When issuing the invoice, make your payment terms very clear so there is no confusion. Outline how much the client needs to pay and by when. Plus of course the implications for not paying.

Issue prompt and accurate invoices Get into the habit of charging a deposit upfront - usually 50% or even the full amount. This could take the form of an incentive for paying upfront. Send your invoices as soon as work is delivered (or sooner if part of the agreement) and make sure they are accurate and contain all the necessary information. For business-to-business arrangements, the government website says invoices should include:

  • your company name, address and contact information

  • the company name and address of the customer you’re invoicing

  • a unique identification number

  • a clear description of what you’re charging for

  • the date the goods or service were provided (supply date)

  • the date of the invoice

  • the amount(s) being charged

  • VAT details if applicable (the amount of VAT charged, your business’ VAT number and a breakdown of the amount of VAT charged for each item on the invoice)

  • the total amount owed

If your client requires you to include a purchase number, make sure you get the number in advance and include it on the invoice. Using invoicing tools provided by online accounting software companies like Xero can help to ensure accuracy of invoices and speed up the payment process.

Make it easy to pay You should make it as easy as possible for your clients to pay so they don’t have the excuse of not knowing how to do it. Make sure your full bank details are included on all invoices or offer more immediate options such as online payment services like PayPal. If you are collecting regular payments from customers, using direct debit is a good solution. You can allow your customers to spread the cost of your product or service across the year. This should encourage them to pay on time, allow more customers to spend money with you and increase customer loyalty. It also helps you manage your payments easily and efficiently.

Build good relationships Developing strong relationships with clients can help to minimise late payments. For businesses providing products or services to other businesses, invoicing is often an anonymous process with email generic accounts@ addresses. If you’ve built a good relationship with an individual and they can put a face or voice to the name, it will make it harder for them to let you down and pay late. Being a small business can be used to your advantage too. Larger companies may not realise the impact on smaller companies of paying a bill late. If you develop a good personal relationship with your client and they know you are running a small business, they might prioritise your payment. If you have consumer customers, you should also maintain a good relationship through regular communication as well as being clear about how much you charge and when you expect payment.

Send regular reminders Regular reminders will help to ensure you are paid on time. Payment deadlines being missed can sometimes be due to a technical error or because the invoice has been genuinely missed. In those cases, a quick call to chase might solve the issue. When chasing a payment, be polite but get straight to the point. Give them all the information they need such as the invoice number, the date the invoice was sent and when the payment was due. Speaking on the telephone rather than sending an email can be beneficial as you’ll know for sure that the customer is aware that your payment is late. Debt recovery If a customer still fails to pay despite all your efforts, you may need help from a debt recovery agency. They can offer advice and manage either individual invoices or your entire sales ledger. Through skilled mediation and professionalism, the suppliers can recover your debts and safeguard valuable relationships so future business opportunities are protected.

Monitor persistent late payers Staying on top of those customers who often pay late is an important part of managing your cash flow. Understanding customers who regularly miss invoice deadlines will help to ensure you identify any potential cash flow gaps and take steps to find other business opportunities to deal with it before it becomes a serious problem. By using online accounting software and working with your accountant, you can use aged debtor reports to identify which customers owe you money and how much they owe.


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