If you’re new to running a business, you may be thinking, ‘Why wouldn’t my customers pay me on time?’
But the unfortunate truth is that, sometimes, even the nicest and most complimentary clients and customers are terrible at paying on time.
Having to wait a long time for your money will make it more difficult to run your business – not to mention life in general. The question is, how can we organise our businesses to make late payments less of a problem?
What is a late payment?
Right now, small-to medium-sized businesses across the UK are chasing down an estimated £61bn worth of late payments. It’s a huge sum. To put into context why it matters, it’s helpful to understand what the legal definition of a late payment is.
All payments for business transactions (the goods and services you’ve provided to a customer) must be made within 60 days. As the Government explains, you should agree to a payment date that falls within this timeframe, and if your customer asks for longer terms, you’re within your rights to push back if you don’t feel that it’s fair.
The 60 days start from either the moment the customer receives your invoice, or the moment you’ve finished providing the goods/services – whichever is later.
If you haven’t agreed on a payment date (and it’s often something people overlook when they’re new to running a business), you’re still covered by the law. Without an agreed date, payments are considered late 30 days after the invoice is received or the work is completed.
Why does this matter?
Late payments matter because if it’s a big sum, or a lengthy delay, or you have several late-paying customers at once, it can start to affect your cash flow.
The problem is that, once a payment is late, it can take weeks or months of further chasing before the issue is resolved. And occasionally, you might come across a customer that doesn’t pay at all.
When these situations occur, it’s not just your bank balance that suffers. Chasing payments takes time and energy, causes stress and anxiety, and generally distracts you from other tasks like marketing or finding new customers.
Also, it’s hard to invest what you don’t have, so if you’re constantly waiting on late payments then you might struggle to put money back into your company and help it grow.
How can we stop late payments from happening?
Although you can’t rule out the risk entirely, there is plenty that you can do to minimise the problem of late payments. Try out the following step-by-step guide:
1. Know your customers
If you’re selling to a business, check them out on Google or social media to see if they have a reputation as a serial late payer. Or if you’re selling to a consumer and it’s a high value product/service, it’s worth politely checking beforehand that they can afford it (for example, “Are you comfortable with the price?” or “How would you like to pay?”).
2. Set shorter payment terms
You don’t have to stick to the Government’s 60-day guidance – you can set out whatever payment terms you like. Customers may push back if you’re asking for immediate or upfront payment, but it will kick-start the discussion and show you’re serious about getting paid on time. You should also write out your terms on each invoice to remind customers of what’s expected.
3. Make sure you understand your customer’s payment process
When selling services to businesses, remember that the bigger the company, the more complicated that payment process is likely to be. Make sure you speak to the finance or accounts team to understand how they process invoices, and whether they’ll need any additional information from you before they can start paying you.
4. Issue invoices as soon as the work is done (or before)
The sooner your customer receives the invoice, the sooner the payment terms set in. So if you really need the payment to arrive promptly, issue the invoice at the earliest opportunity. You can even do this before you have finished the work to give a heads-up that payment will soon be needed.
5. Make payment as easy and straightforward as possible
There are many different methods for taking payments – from portable card readers, payment links to good old bank transfers. Your goal is to figure out which option guarantees the speediest payment from your customer, and balancing that against any fees you’ll have to pay to process the transaction.
6. Chase customers on outstanding invoices before the due date
Most customers won’t object to a polite reminder about a payment. Don’t hound them every day, but equally, don’t wait until the due date before nudging them - and don’t feel embarrassed about chasing them once a payment is late.
7. Create a contingency plan
Think about how you’ll respond to a customer that isn’t paying up, and consider what you’ll need to do to protect your business if the payment never arrives.
For example, once the payment is classified as late, you’re allowed to charge interest on it. The FSB has a handy explanation of how you calculate this interest here. This might not be appropriate in every case (such as a customer who has had their own unexpected financial shock) but it’s an option to bear in mind. Sometimes, advising a customer that you’re about to start charging interest might be what’s needed to rally them into action.
The Government is currently exploring further ways to help business owners take action against problem payers, and there are different types of non-payment insurance options you can explore. However, perhaps the most practical measure is to always ensure you have some emergency cash in the bank, so that a lengthy delay or a non-payment doesn’t restrict your ability to carry on working.