7 tips for preventing late payment

Late payment remains a serious problem for small businesses across the UK.

New figures from the FSB show that some 77 per cent of its members have suffered late payment at least once over the past year. More than half had written off invoices with a value of up to £10,000 because they could not get them paid.

Late payment is, sadly, a fact of life for businesses of every size. But that doesn’t mean that you are powerless in the face of tardy clients. Rather, with a few simple steps, you can help to minimise invoice ageing – and ease your cashflow.

1. Make your payment terms clear

It sounds obvious, but you need to make clear from the outset when you expect payment to be made. You cannot hope for your clients or customers to pay on time if they don’t know what the timescale is.

Make sure that your payment terms are contained in your agreements with clients and customers, and that they are prominently displayed on invoices. You should also consider adding your bank details to your invoices in order to avoid the common excuse that the client doesn’t know how to make payment.

2. Automate your response

Many accounting software solutions are now capable of issuing automated reminder letters when payments become overdue. This can significantly reduce invoice ageing.

Often, all that a customer needs is a reminder email. Automating the process of sending these emails can reduce both the length of time you spend waiting for payment, and the amount of time you have to spend chasing clients. A comprehensive solution should also allow you to decide precisely when you want reminders to be sent, meaning that you can have them delivered at pre-determined intervals.

3. Consider credit checks

Depending on the size of the client and the value of the order, you may consider performing a credit check before you decide on payment terms. Credit checks can help you to identify clients who may pose a risk, and they can allow you to make informed decisions about those clients.

Credit checking services are quick and can be very cheap. In addition, you should consider carrying out basic checks like a Companies House search if you are unsure about a client’s legitimacy.

4. Offer incentives

Offering a prompt payment discount can be a highly effective way of reducing invoice ageing. Many large companies use this technique to great effect - have a look at your latest BT bill for an example.

Consider offering a percentage discount on invoices that are settled either on receipt, or within a certain number of days. The discount you offer will obviously depend on a range of factors, but it needs to be large enough to make it attractive to clients – while not shaving too much off your margins.

5. …but wield a big stick

At the other end of the bargain, though, you need to be prepared to be firm with clients who consistently pay late. Remember that you are under no obligation to extend credit to anyone. With this in mind, you might consider changing your payment terms for those who do not stick to the deal – or, in the most severe cases, you might consider whether or not you are prepared to do business with them at all.

6. Understand clients

You may be able to reduce chronic late payment by developing a closer relationship with your clients. Try to understand how they operate, and the challenges they face. In addition, try to build a rapport that is both professional and friendly. If the client can see that there is a human face associated with the invoice, they are more likely to pay it in a timely manner.

7. If all else fails…

Finally, if you have exhausted all other avenues, you might consider hiring a debt collection agency to help you recover money that is owed to you. You should remember, however, that this is likely to signal the end of your relationship with that client – so before you take action you need to weigh up the value of the debt with the potential value of future custom. Additionally, under the Late Payment of Commercial Debts (Interest) Act, creditors have the statutory right to claim interest on late payments. Read our article on claiming compensation for late payment.

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