Late payments, compounded by lengthy payment terms, present a challenge for businesses to operate effectively. For SMEs in particular, being owed money due to missed payments can cause funding gaps, affecting cash flow, hampering growth and impacting the ability to pay staff or suppliers on time.
When it comes to profitability, most small businesses focus their attention on making sales and earning revenue. However, managing accounts receivable can have just as big an impact on the bottom line.
A positive step to getting paid is to have clear steps to encourage customers to pay promptly and to limit the impact of late payment when it does happen.
Let’s talk about payment practices and how you can get paid on time
Know your customer
Run credit checks on all new customers before offering credit terms and set appropriate credit limits. A simple credit check online could save valuable time and money. This should be an ongoing process as even the most reliable payers can have a change in circumstances.
Explicit payment terms
Make your payment terms clear and consistent and let customers know up front about any late payment charges to avoid future disputes. The standard term of 30 days gives a basis for you to chase payment and take further action if it becomes necessary.
The right invoice format
Invoicing is essential and there is a basic format that you should stick to. This document is important because you need to keep a copy as a record of your sales, and your customer needs to keep a copy as a record of their purchase. You should clearly display the word “invoice” and include a unique identification number, your company name, address and contact information, plus the company name and address of the customer you are invoicing. Also, a clear description of what you are charging for, the date the goods or service were provided, the date of the invoice, the amount(s) being charged, any tax if applicable, the total amount owed and the payment due date.
Don't give customers an excuse not to pay
Maybe this sounds familiar: “I posted the check last week” or “I’ll make the payment in a couple of days.” In many cases, excuses will simply mean delaying payment for as long as possible. Make a conscious effort to send reminders as invoices become due. If payment is late, pick up the phone and have an informal conversation to understand why payment is late. If there’s no response within two business days, follow up again and if you’re not satisfied with the explanation, request a face-to-face meeting to resolve the issue.
Adjust the frequency of invoices
If you’re concerned about a customer, consider invoicing weekly rather than monthly. That way, they need to pay you quicker and if they do pay late you can charge a late payment fee on each invoice to reduce the risk.
Remove credit terms for persistent late payers
If you have a customer who frequently pays you late, consider reducing or removing any credit limit that you have in place with that customer. Be sure to state this policy in your Terms and Conditions from the outset. You can also consider requesting an up-front deposit or partial payment.
Overdue payment affects a large number of businesses, but there are proactive measures you can take to improve your payment practices and get paid before issues arise. In an environment where cash flow is key to small business survival, adopting better practices enable you to take proactive measures and reduce the risk of late payments. If late payments still cause your business cash flow issues then you should consider invoice factoring or invoice discounting.