Chasing late payments is an inevitable part of running a small business. After all, on average nearly half of all invoices (48%) are paid late every month, according to figures from accounting software company Xero.¹
However, according to the Small Business Commissioner, late payments force 20% of SMEs into cash flow problems², so having a strategy in place to chase overdue invoices and get them paid as quickly as possible is essential.
Find out what Philip King, interim Small Business Commissioner, and Carl Reader, small business owner and director of D&T Accountants, have to say about tackling late payments in our Business Class: Money Minutes podcast here.
Now, we’ll take a look at some expert tips for getting invoices paid swiftly to maintain a positive cash flow.
Tip #1: Agree on terms before any work is done
Jenni Riley is the founder of international IT services company ITARMI. Her company runs on 30-day payment terms. “We have agreements in place with our clients with agreed terms for payment,” she explains. “This just keeps lines clear and communication open so that we know we aren’t chasing for anything other than what has been agreed to. Getting those agreed upfront again is imperative to the business model, and ensures our engineers are paid quickly.”
Tip #2: Ensure you have the information to invoice before carrying out the work
Riley says that ITARMI requires a purchase order number from customers before sending engineers in to do the work. “We now don’t go on site without a purchase order number,” she says. “It means that we get paid within an agreed time frame – 30 days – but it's more about not being left vulnerable.”
Before implementing that rule, Riley explains, the company had instances of clients withholding purchase order numbers after the work was carried out. “Then we’d wait another 30 days for payment, so we ended up waiting 100 days from the date of the job.”
Tip #3: Maintain regular contact with clients
Reader recommends contacting clients between five or 10 days before the invoice is due. “Just confirm that the payment is in process,” he says. “Ask them: ‘Are you happy you know how to pay us? Do you have all our details?’ That can then be followed up with a chaser on the day the debt is due, and then another rapidly afterwards.”
If you use an automated system, it’s worth checking how regularly it sends reminders. “Some are set to only chases debts once per month,” Carl says. “It’s a worthwhile investment to try to work out how you can chase more frequently.”
Tip #4: Call them, don't email them
Communication is important in this situation so don’t be afraid to have a phone call with your customers – it’s much easier to ignore an emailed request for payment. It also means you’ll know sooner if your customers need more time to pay, perhaps because they themselves are also chasing outstanding payments, and you can plan accordingly.
Taking this more personal approach could help you come to a solution which works for both parties. If you don’t have the time or resources to contact everyone, just focus on the high-value invoices.
Tip #5 Empathise with their position
A little empathy goes a long way. Everyone is in the same boat and most of your clients will be struggling rather than purposefully trying to postpone paying. When this crisis passes, you will still need your customers and you will want to maintain your reputation as a business that tried to do the right thing.
So, if you can afford to give customers breathing space, do. You could consider putting a payment plan in place so customers can clear a debt gradually in instalments, or allowing them a grace period on the understanding that the invoice will be settled by a mutually agreed date.
If you can’t do this, it’s better to start off using the ‘carrot’ rather than the ‘stick’ approach: Offer a discount for immediate payment or payment within a short timeframe. Pledge to make a donation to charity for every invoice settled on time.
If this doesn’t yield results, you could introduce a new policy of adding interest or late fees to overdue invoices. Just the thought of a larger bill may be enough to make your invoice more of a priority. But rather than add new charges to existing bills, you’ll need to warn customers this policy will apply to all future invoices, so they can’t argue you’ve changed your terms without informing them.
Tip #6: Use tech to make it easy for clients to make an invoice payment
Make it as easy as possible for customers to pay your invoices, ideally with just one or two clicks. Check if your cloud-based accounting software has automated regular payment reminders or automated late fee charges for customers.
According to Xero’s “State of Late Payments in 2019” report, payments were received on average 21 days earlier if invoices featured a ‘Pay Now’ button. Reader says he’s noticed an increase in the number of late payments resulting from the processes being too convoluted. He recommends using an invoicing system with integrated payment systems. “That means when these chasers come through, business owners can click on a button and it’s seamless to pay – it’s not as painful as plugging into online banking and setting up the details,” he says.
As well as using an invoicing system to give yourself every chance of receiving payments on time, it can be useful to keep a firm grip on company expenses. The Amex Business Gold card comes with automated bookkeeping and expense management tools to help you do this. That way, you’ll always have a clear view of your day-to-day spending to compare with your expected incoming payments.
Tip #7: Invoice more frequently
You could also start invoicing more frequently, using your software to keep track. If you previously invoiced once a month, switch to weekly or as soon as any work has been completed. This could help improve your company’s cash flow.
Tip #8: Ask for deposits or partial payments
For upcoming work, consider asking for a deposit or partial payment upfront, or only releasing goods or work when you have been paid in full. This is especially important for customers you think are most at risk of non-payment in future.
Tip #9: Make use of late payment charges
Under the Late Commercial Payments Act, businesses are entitled to charge statutory interest of 8% plus the Bank of England base rate on outstanding invoices. Businesses can also claim debt recovery costs, a fixed rate depending on the value of the invoice. For example, for outstanding payments of up to £999.99, you are entitled to charge a fee of £40.
Small business commissioner Philip King explains how one SME owner he has worked with, regularly invoices clients for late payment fees, not because she wants to pursue legal action or charge her client the additional amount, but “because she knows it will make the client revisit her original invoice and take it seriously. Her aim is to get the original invoice paid."
Tip #10: Follow through on warnings to escalate
According to Carl Reader, one problem financial controllers can run into when chasing outstanding invoices is being perceived as all talk and no action. After sending a number of reminders, he sends a formal letter from his solicitors. “Although there’s a small cost involved, it shows you’re prepared to invest money in getting the debt recovered, so it’s a great first step,” he says.
Bonus tip for further action
If all else fails, you could consider selling your invoices to an invoice factoring or finance company who will either give you a loan based on the value of your accounts receivable, or purchase them from you, less a percentage fee, and then chase the invoices itself.
Finally, don’t forget the resources available to support you getting paid. The Small Business Commissioner’s office was set up to offer free support to SMEs and can chase payments on your behalf.
As well as employing effective strategies to tackle late payments, an American Express® Business Gold Card can give some breathing space in case something unexpected comes in; it offers a payment period of up to 54 days³, lifting the pressure to clear your balance and allowing more time to focus on running your business.
3. The maximum amount of time for a payment period on purchases is 54 days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. The American Express Business Gold Card has an annual fee of £175 (£0 in first year).
Listen to the Business Class: Money Minutes podcast here.