Chasing late payments is the bane of many a small business owner’s life, costing them time, money and resource. In fact, recent research has found that UK small businesses are chasing £14.9bn in late payments, with 58% of SMEs owed up to £10,000 and 27% owed over £20,000.
In many cases, perfectly viable and successful businesses are put in a vulnerable position by their customers’ inability to make payments on time. To make matters worse, business owners are put in the awkward position of chasing late payments that should have been made, which can be a stressful and unpleasant process.
Here are some tips that could help you get paid sooner rather than later and remove some of the stress associated with chasing a late payment.
Agree payment terms ahead of time
Payment terms are something that every small business should establish with each client before they agree to provide products or services. Discussing the terms at this point can be a simple way to avoid having to chase payments later on.
While 30-day payment terms are considered to be fairly standard, in certain industries they can be longer. It’s often the case that large customers use their clout to bully smaller suppliers into agreeing payment terms of 60 days or more, but be very careful about the payment terms you accept as the strain on your cash flow can be severe.
If you have a new client or an existing client with a track record of making payments late, it can be effective to send a payment reminder one-week before the due date. It could be something as simple as:
I hope you’re well. This is just a reminder that payment for invoice 355 is due next week. If you have any questions, please get in touch.
Be firm but fair
If the deadline passes and there’s still no payment, it’s time to send a friendly email reminder. Writing an email to chase a late payment is never easy. You don’t want to be rude or too demanding, but equally, you want the payment to be made without having to waste more time chasing. Having an email template to turn to can save you a lot of time.
I hope you’re well. Just a quick reminder that invoice 355 is now due for payment. If you could settle it at your earliest opportunity, I’d appreciate it.
If there’s still no response, or payment, after a couple of friendly email reminders, then you should not be afraid to reiterate the terms you originally set out.
I’ve still not received payment for invoice 355. I attach another copy for your reference. At this point, I’d just like to remind you that I do reserve the right to apply interest to late payments as detailed in my terms.
Don’t be afraid to pick up the phone
As a late payer, it’s very easy to disregard an email chasing a late payment, but a phone call is impossible to ignore. Be polite and keep things friendly but make sure you’re given assurance that the payment will be made immediately or on a specified date. It’s possible the client is experiencing a temporary cash flow shortfall themselves and is genuinely very sorry that the payment is late.
If you still haven’t received payment, phoning the client again can add sufficient pressure to move things along. At this point, you should think very seriously about whether you want to do business with the customer again.
Consider offering early payment incentives
Chasing late payments can be a combination of carrot and stick. Early payment incentives that offer a 2% reduction on the balance if payment is received within seven days, for example, can be extremely effective. This can be a win-win for both parties as it frees up cash flow for you and makes good business sense for the customer. However, it will also put a small dent in your profit margin, so that’s something you should consider carefully.
Charge interest on late payments
Just as you have to pay interest charges on late credit card payments, you can also make your clients financially accountable for paying you late. The statutory interest you can charge another business on a late payment for goods and services is 8% plus the Bank of England base rate. This should be clearly set out in your invoice payment terms.
It’s at your discretion whether you decide to charge interest on a late payment or not. Factors you should consider include:
- Whether the customer is a frequent late payer
- The likelihood of damaging your relationship with the customer
- The potential damage losing the customer could do to your business
Automating the collections process
While chasing late payments might seem like an unavoidable part of running your business, there are simple changes you can make to remove the risk of late payments entirely. Automating your collections process with a provider like London & Zurich ensures payments are made with total efficiency every single time. Contact L&Z today to find out how our Direct Debit service can transform you collections activity.