Steve Dinsmore, corporate finance manager at Armstrong Watson, gives his top tips for handling the problem of late-paying customers.
Britain’s small and medium-sized enterprises (SMEs) are still suffering from the effects of late-paying customers. Recent research by merchant banking group Close Brothers suggests late payments are a problem for 47% of SMEs – of those, one third complained it was significantly impacting their ability to trade, while two-thirds bemoaned the impact on their cash flow.
The amount owed to SMEs by customers who fail to pay their bills on time is staggering. Although there have been government-led attempts to tackle the scourge of late payments, SMEs continue to suffer.
In fact, the research suggests the UK’s late payments crisis is getting worse. One third of SMEs Close Brothers spoke to said that their difficulties were worse today than a year ago, while just 8% said there had been an improvement.
How, then, do SMEs tackle this problem? There is no one-size-fits-all solution to the scourge of late payments, but these nine tips will help.
1. Know your customers
Complete credit checks on new customers before agreeing credit terms and limits. Using Experian, Creditsafe etc can flag up potential problems with customers. You should also monitor and regularly check existing customers.
You can take this one step further, and look into credit insurance, which protects the business against bad debts or late payments.
This can save you time and money in the long term by identifying potential issues early in the relationship.
2. Be clear about your payment terms
Agree payment terms verbally with customers and follow up with clearly defined terms in any contracts / terms and conditions of business.
Always ensure that your payment terms are on every invoice you issue and keep these consistent.
3. Avoid cheques
Ask customers to pay using cash, electronic transfer or direct debit, so that there is no opportunity for payments to be rejected.
4. Invest in credit control
Ensure that your credit control staff are well informed and capable of undertaking the role. They should be consistently firm, but polite, resilient and organised.
There is the option to outsource this if the capability is not in-house, to specialist credit control businesses.
Appropriate accountancy software should be used for invoicing, reminders etc to give credit control the best available information and the chance to collect outstanding invoices.
5. Make a courtesy call
If you’ve issued a customer with an unusually large invoice, call them up before payment is due to make sure it has been received and there is no query or issue preventing payment on time.
6. Start chasing right away
Don’t delay in chasing a late payment – start the day after it was due. The longer you leave it before you contact your customer, the further down the queue your invoice will drop.
7. Claim interest
You have a statutory right to claim interest on late payments at 8% over the Bank of England base rate. You can also claim compensation for debt recovery costs. Letting your customers know this as early as possible may encourage timely payment.
8. Be flexible
On larger outstanding amounts, be prepared to offer flexible payment terms. Whether this means regular instalments or simply splitting a bill into two manageable chunks, it may be your best chance of payment in some circumstances.
9. Consider invoice finance
Invoice finance enables you to unlock money tied up in unpaid bills and will help you manage your cash flow despite late payments.
Whether you would prefer to manage the credit control element yourself, or outsource it, there is a product that will suit your business.
Steve Dinsmore is corporate finance manager at Armstrong Watson. Armstrong Watson LLP is our partnered provider of accountancy services to law firms.