10 tips for taking a Proactive Approach to Late Payments
According to figures released in November 2019 by Pay UK, which runs the Bacs Direct Credit and Direct Debit payment services, 8 out of 10 private sector late payments are owed to SMEs by other SMEs. It’s a vicious cycle that will continue to churn if measures aren’t taken to prevent this situation from spiralling further. As uncertain as it may seem to manage and maintain relationships while issuing invoices, you won’t be struck down for demanding what is duly yours. It takes a delicate hand to not damage any business relationships when chasing down your late payments, but if the option is no payments for work you’ve already done, then ruffling a few feathers is by far the better option.
The consequences of no payments and accepting late payments as a matter of course, just to avoid conflict, are astronomical in their ripple effect. The average late payment debt burden has increased to £25,000 per company, up from just over £17,000 in 2018, with SMEs reporting that, on average, a debt burden of £35,000 could jeopardise their business.
An Intuit QuickBooks report on UK SMEs discovered that on average, they spend more than a week chasing after late payments amounting to over 56 million work hours a year. Similarly, the Federation of Self-Employed and Small Businesses estimates that 37% of SMEs run into cash flow problems because of late payments. A third (35%) of UK SMEs are forced to rely on bank overdrafts, while almost a quarter (24%) maintain that being paid late forces them to hold off paying their suppliers.
Tide, a digital banking platform, conducted research that revealed the average UK SME is chasing five outstanding invoices at once, wasting an hour and a half every day. For SMEs who hope to grow and survive the coming economic onslaught, time is money. Tide surveyed 1,000 chief executives and senior management staff at SMEs to analyze their use of time over the working day. The study found that such figures are spending almost a third – 30 per cent – of their time on unprofitable admin tasks such as chasing payments and managing expenses.
Tips for taking a proactive preventative approach to late payments-
1. Invoice Customers As Soon As Possible
The first port of call to tackling this problem is in your own company. The quicker you can send out your invoices, the quicker you get paid, simple as that. It may seem like a menial task, but it’s better than the insurmountable task of running your business with zero capital.
2. Ensure Payment Terms Are Clear with Written Agreements in Place
Negotiated payment terms should be written down, with all the written agreements made with regards to terms, fees, interests in the case of late payments, and deadlines clearly and effectively communicated to all parties. From the onset, being honest and clear with your customers about payment charges should help reduce the problem.
3. Make It Easy to Get Paid
The payment process should be as effortless as possible. Invoice via multiple messaging channels – invoicing via SMS can be incredibly successful for small and micro businesses and can be more beneficial than email. Ensuring that the process of payment is seamless and can accommodate many avenues of payment, will be convenient to both you and your customers.
4. Get paid electronically
In this day and age, most successful businesses have downloadable apps that make it very convenient and quick on the part of the customer. Accepting online payments is an innovative solution to fast track the payment process, and there are many accounting software technologies available to assist you with this. Using these types of payment technology usually means that funds are cleared and ready for use on the same day – earning interest straight away, and providing you with cash flow to keep your business going strong. The number of online payment technology providers continues to increase, offering increasingly simple technologies for online payment or even at the point of purchase. It is simply a question of finding and selecting one that is the best tailor suited to your needs. Both Apple Pay and Google Pay are also making it easier for developers to build their payment solutions into proprietary technologies which, ultimately, makes things easier and more likely that customers will pay on time.
5. Be Proactive
Always chase late payments early (or use a payment provider that automates this process). Prompt action can often identify payment problems, and give you enough time to resolve the situation. If your customers are affected by the current economic climate, as are most, you should take initiative to reach out to all of them and ask if payment will be completed at the time previously agreed, and see if any adjustments will need to be made.
6. Manage and keep an eye on the Risks
As we’ve said previously, a key risk to be aware of at this time, is whether a customer’s industry has been impacted by the pandemic. If this is the case, as stated before, get in touch to express your concern and discuss a payment plan. If a customer proves to be a risk, but you want to maintain the relationship, adapt your payment terms to protect your businesses from any fallback. Ask for a deposit, or only hand over completed work after receiving full payment are good options to continue doing business with customers and protect yourself at the same time.
If you feel the need to take that extra precaution and wish to do a full credit check on your customers, paid services, such as Equifax, CompanyCheck, CreditSafe and Experian provide a range of detailed information including the company’s credit score, their payment performance, and whether they’ve received any County Court Judgements. This is useful information, but you do need to pay for it: Experian charges £25/month, whereas CompanyCheck charges about £10 per report.
7. Create Regular Payment Schedules – And Stick to Them
Payment schedules are the glue that holds the whole system together. They keep everyone in check about when payments are due or soon might become so, and without a solid schedule in place invoices will soon become an intractable hassle. Communicate the schedule clearly to all customers, and set up email alerts to remind them of approaching payments. If you’re using an accounting tool like Xero or QuickBooks, you can set up automatic invoice reminders to send to these customers.
A quick tip is to charge all customers at once on a specific day or days of the months, so it is clear when you should be sending out invoices, and at what point should the grace period end.
8. Reward and Punishment
Incentives are sometimes needed to ensure you’ve captured the customers’ attention, and then diverting that attention back to any payments due. Leverage your customer FOMO- although not suited to every industry, this is a classic sales technique and can be incredibly powerful in business. By carefully using language and prompts that give a sense of ‘scarcity’, all the while urging customers to confirm their intentions or interest with payment can have a big impact on the payment cycle.
You could offer settlement discounts to those who are maybe dragging their feet. If you can talk customers into paying up early by incentivising that any ‘Early bird’ discounts, which are typically a 2% reduction on invoices paid within 15 days of receipt, you could be offering a more attractive option to customers to pay more promptly and also keep your cash flow strong.
Some companies are hesitant to take this next step-demand interest on late payments. You are legally entitled to it, and the prospect of losing a customer because of it is often feared by businesses. No one like to pay more than they should, or feel cornered into it, but the fact remains if there are no negative consequences to late payments, businesses will find it difficult to stay afloat based on just the esteem of their customers. Money makes the world go round, and in this case, a hard stance is needed to ensure your customers are aware you mean business, and late payments won’t be tolerated.
9. Get Automated
Being assertive when it comes to chasing down late payments can be difficult, so cut out the middle man. By simply removing the human element from the booking and payment process. Introducing an automated system that deals with customers on your behalf means they will be less likely (or less able) to ask for relaxed payment provisions. If they truly need extra leeway, make the time and talk it through with them, but in that case, it will be them reaching out to you specifically to discuss the situation. Otherwise, they will just go through the system unless pushed by their situation to ask for help.
10. Use the right mix of communications and technology
The payment process can and should be automated and you should make use of all available new technologies, but we still have not completely given in to the robots. Companies need to achieve a delicate balance of technology and communication to encourage payment will depend on the circumstances and the relationship you have with your customers. To deliver the right customer experience and also reach your end goal of getting paid, keep a few core questions at the top of your mind; should it feel more or less personal? Are they making multiple or repeat purchases? Are they making small or large value purchases? How much leeway can we allow due to the current climate? How much has the current climate affected this particular customer?
Lastly, if you have customers who regularly pay you late, familiarise yourself with late payment legislation.
Government Action to Combat Late Payments
In March 2020, the administration of the Prompt Payment Code moved from the Chartered Institute of Credit Management (CICM) to the office of the Small Business Commissioner (SBC). This was in response to the Government’s ‘Creating a Responsible Payment Culture’ Call for Evidence in 2019. The aim is to bring all late payment initiatives under a single umbrella.
The Code’s purpose is to promote a culture of prompt payment. Its 2,500 signatories have committed to paying 95% of invoices within 60 days and work towards 30 days as normal practice. Several businesses that have failed to honour those commitments in the last 12 months have been removed, and only reinstated when a suitable remedial plan has been approved by the PPC’s Compliance Board.
Additional solutions Available-
CICM-provides over 15 cash flow management guides, from invoicing to how to chase late payments and what to do if all else fails. – https://www.cicm.com/resources/cashflow-guides/
iwocaPay- acts as a new payment method for your business. You’ll get paid upfront for your invoices while your customers spread their costs over up to 90 days. iwocaPay takes on all the credit risk and administration so your business is protected from bad debt and late payments. That way, you can focus on your business while we take care of your payments. – https://www.iwoca.co.uk/iwocapay-sellers/
The Government also publishes its Payment Practice Reporting data, which is. publicly available through gov.uk. – https://www.gov.uk/check-when-businesses-pay-invoices