Late payment advice for small businesses
Late payment is a significant problem for many businesses. Research this year has revealed that there is a huge £63 billion in unpaid bills affecting UK small businesses. But as a business owner a major part of your job is to ensure sufficient and smooth cashflow. Late payment is one of the quickest ways to damage the health of your business – and this can have disastrous effects for even the most profitable businesses.
Of course, standard payment terms differ from industry to industry. If you run a sandwich shop, for example, you are unlikely to be affected by this as you would expect payment on receipt of the goods. Conversely, firms operating in other industries would expect to be given at least 30 days to pay their invoices.
If your business is, or could be, affected by late invoice payments there are a few measures you can take. Don’t be scared to set your own payment terms and to expect your clients to abide by them. You should keep a constant eye on the ageing times of your invoices – that is, the length of time that elapses between you raising an invoice and it being paid. The aim is to keep these periods short, and to effectively manage your expenditure around them, in order to ensure that there are no troughs in your cashflow.
Begin by thinking about ways to ensure prompt payment before you even raise an invoice. There are several ways in which you can pre-emptively reduce your chances of falling victim to late payment. These include:
Vetting customers. Depending on the nature of your business, you may be able to vet your clients before agreeing to do business with them. Consider running credit checks on potential customers in order to ensure that they have a track record of prompt payment. Many credit reference agencies provide affordable solutions for small businesses.
Outlining payment terms. It is vital that you make your payment terms clear from the outset. This will help to ensure that your client makes suitable plans, and cannot use an excuse of ignorance to stretch out their payment times. Make sure that your payment terms are clearly displayed on invoices, along with details of payment methods. If you accept payment by bank transfer, make sure your account details are included too.
If all else fails …
Frequently, despite your best efforts, payments will still be late. In these instances, there are a few steps you can take to minimise the length of time for which your invoices age.
This might sound obvious, but it is vital that you chase outstanding invoices. Remember that your clients will be concerned about their own cashflow, and this may well mean that they leave payment until the very last minute. Frequently, however, a phone call or email is all that is needed to ensure settlement. Do not be scared to chase late-paying customers; you are well within your rights to do so.
You should maintain a ‘slush fund’ in order to ensure that you are never critically short of cash because of an unpaid invoice. The size of this fund will depend on the average value of your outstanding invoices, and your regular expenses but, at the very least, it should be large enough to cover costs like wages, rent and stock. You may wish to consider arranging an overdraft facility for this purpose.
Factoring and other invoice finance products can provide you with an advance of up to 90 per cent of the value of your invoices within 24 hours of them being raised. Your factoring partner will pay you the cash, and then take on the work of chasing your client for payment. Once the invoice has been settled, they will pay you the outstanding balance, minus a pre-agreed service fee and interest. A factoring facility is usually cheaper than using your business overdraft.
An increasing number of factoring companies are offering ‘transparent’ services. Under these arrangements any communication between the factor and your clients will appear to have come directly from your firm. Your clients need never know that you are making use of a factor.
Simply Business offers a way to compare quotes on factoring facilities and our partners will guide you through the set-up process and beyond.
As stressful as invoice chasing can be, it is vital that you do not lose your temper with clients. An argument over money is the quickest way to sever a relationship so, if you wish to do business with the client in the future, you should ensure that you remain cordial throughout.
Late payment is a major danger, and an issue that is frequently cited as a reason for business collapse. If you are to maintain a healthy cashflow it is vital that you develop efficient procedures for customer vetting and invoice chasing. Without these skills you risk placing your business at severe financial risk