Late payments are the bane of any small business. It doesn’t matter whether you’re a solo freelancer, or you’re heading up a multi-office team, when a client doesn’t pony up, it can cripple your operations.
Not only is your cash flow severely affected, you then waste precious time and energy chasing up the invoice with a customer who is suddenly giving you radio silence.
Late payments are a real issue for UK businesses today – recent research found that 58% of UK SMEs said late payments are putting their business at risk, and the average amount of outstanding debt equates to a whopping £63, 881 per business.
So what can you do to minimise the risk and ensure you get what is owed?
Set out your terms up front
Be clear on your payment terms. When you’re first starting out it can be tempting to take an informal route, but having something in writing can help further down the line, and your terms and conditions don’t have to be a novel. Make sure it’s clear how soon you expect to be paid and lay out any late fees.
But sometimes just setting out your terms isn’t enough – depending on what line of business you’re in, you might want to ask for a deposit of around 50%. It may feel awkward, but ask any business owner who takes deposits when they started asking for one, and they’ll all have tales of the harsh ways they learned it was necessary!
Keep on top of your invoicing
While the onus is on a customer to pay up, you should also take responsibility for keeping on top of your invoicing situation. It’s easier to recover a one-month-old debt than a year-old debt.
Have a good system in place for dealing with late payments as they happen. A friendly email reminder once the invoice is officially late can spur a forgetful client into action – not all late invoices are deliberate! If you use an online accounting system like Quickbooks, they can automatically generate these payment reminders without you even having to lift a finger.
Be flexible without bending over backwards
An aggressive approach to invoicing can be just as damaging as a laid-back one! If a client asks for more time, or to set up a payment plan, there may not be a need to slap them with late fees – as long as they are sincere about paying. Don’t cut your ties immediately, as they could end up being a repeat client for years to come. At the same time, know when excuse after excuse is just dragging things out on purpose, and at this point, step things up.
What else can you do?
As a general rule, it’s best to diversify your income stream. Relying too much on one client can ruin your business if they suddenly go bust. Large corporates are usually the worst offenders for late payments, but are usually the ones with the most available cash to pay, so don’t give up. A well-timed call to the accounts department can work wonders. Don’t forget that you can charge interest on late payments too!
If your payment is still not forthcoming, and you haven’t got the time or the inclination to pursue legal action, you can sell your outstanding invoices to a collections agency who will chase the invoice themselves. You’ll usually only get around 50% of the invoice value, but it’s immediate and 50% is better than 0%!
For more ideas of how to manage your cash flow effectively, give us a call!