Chasing late payments is one of the least enjoyable elements of running your own business however it is unavoidable if you don’t want to run into issues with your cash flow. It also takes valuable time, and in extreme cases, the time spent chasing the payment may cost you more than the value of the original order! Here are my tips on how to avoid late payments:
Start by issuing invoices quickly and accurately. Any mistakes or information missing from an invoice will only delay payment, so ensure the invoice contains all the pertinent information including the amount, when it is due, how it should be paid. Crucially, it also needs to include what the terms are should the invoice not be settled by the due date. This makes future conversations a little less awkward if you can refer back to the terms you previously communicated to the customer.
Consider the terms you offer your customers and whether you could amend them to work more in your favour such as requesting payment on delivery, discounts for early payment, or interest on late payments.
If others in your company deal with payments, ensure there is an established policy, and no amendments can be made without authorisation.
Assess how easy it is for your customers to pay you with your current system. The process should be as painless as possible, for example accepting online payments instead of requesting cheques. Online accounting packages allow you to add a “pay now” button to invoices which connect to payment services such as Stripe, GoCardless or PayPal. For customers who make recurring payments, I suggest setting up a standing order or direct debit, which saves time for both parties.
It’s good business practice to regularly send customers statements so they can ensure they have the details of all invoices owed. Late payments might be an administration issue where an invoice has simply been overlooked.
There are software add-ons to cloud-based accounting packages that automatically send customer statements and associated cash management activities, which may be worth investigating.
What should I do if a payment is late?
A personal approach is often the best, and so if a client is late paying, call to discuss the payment and identify if there is a reason why it is late. Depending on the situation, you may wish to remind them in a friendly and professional way of the payment terms agreed and outlined in the invoice.
Don’t set a precedent for allowing late payments – if a customer fails to pay, contact them as soon as they’re late, do not leave it, or otherwise, they might always be late paying.
Keep following up with emails and phone calls until payment is made. You may wish to offer the customer a payment plan and agree on monthly instalments if required.
If payment is still not made, you can issue a new invoice that adds interest to the original amount. Late payment legislation sets the interest rate, which stipulates you can charge statutory interest currently set at 8% plus the Bank of England base rate for business-to-business transactions, and details of how to calculate the charge can be found here*. You can also add compensation to the new invoice, currently set at £40 for debt up to £999.99, £70 for debt between £1,000-£9,999.99, and £100 for debt worth £10,000 or more*.
If the above attempts are ignored, follow up with a formal letter advising that payment must be made by a certain date, or a court claim will follow. This is known as a ‘letter before action’, which warns of imminent legal action if the debt isn’t settled by a certain date. In my experience, once this letter is sent, payment is quickly received, and I have rarely had to resort to legal proceedings.
If payment is still not made by the date outlined in the ‘letter before action', the next step would be to issue court proceedings and/or seek the advice of a solicitor.
If you feel you want to undertake court proceedings yourself, there is an online government service to help claim owed money (under £100,000 and within England and Wales) called Money Claim Online (MCOL), which can be accessed here.
The current court fee starts at £35*. A guide for claimants to help navigate the system is available here.
If your finance function needs any support dealing with late payments or cash flow, please contact me. As a part-time Finance Director, I tailor my experience within large corporations to benefit SMEs, and I have a passion to help business owners achieve their potential.
+44(0)7715-421688
caroline@haleportfolio.co.uk
www.haleportfolio.co.uk
*Correct as of April 2023.
Comentários