Running a business can be difficult enough without the added problem of customers who pay late or try to evade payment. When an expected payment is not forthcoming, the difficulties this can present to a small or medium-sized business (SME) are potentially enormous.
In addition to causing problems with cash flow, being owed money can lead to lost time as resources are diverted towards recovering the debt. Such debts will undoubtedly have an impact upon a business’s overall profitability. However, the problem of late payment in the business world as a whole is endemic and so it’s a good idea for every business to consider the steps that should be taken towards being paid.
Make sure the worst doesn’t happen
Some businesses are able to request payment in advance for products and services, however this is not a realistic option for many - especially those whose customers demand credit terms. In these cases, there are a number of other avenues that could be pursued.
Business Link suggests, for example, that organisations must ensure that their customers are fully aware of the specific terms and conditions of business from the outset, and that offering inducements such as discounts may help to ensure that customers pay on time.
When considering terms and conditions, a business should ensure that a number of elements are covered, including delivery arrangements, costs, terms of payment, any credit limits and action that can be taken in the event of a payment becoming overdue.
“In some cases the terms may be based on an informal, verbal arrangement. However, there is less chance of a dispute arising if the agreement is clearly set out in writing and agreed in advance with your customers,” said Business Link.
In addition to establishing terms and conditions it may also be a good idea to submit a potential or existing customer to a credit check. If they currently have a poor credit history, there is a strong possibility that future payments for goods or services could be at risk. It is worth bearing in mind that any credit checks will require the full consent of the customer but it should not be a problem if they are a credible company. A business might also decide to offer a new client an initial credit limit before any checks have been completed.
“Ideally, all customers should be credit checked so that the amount outstanding from them is controlled and future sales efforts can be focused on your most reliable customers - there is no point wasting time on customers who represent a greater financial risk,” said Business Link.
What to do if a payment becomes late
While it is always wise to make contact with the debtor to resolve the issue in a way that involves the minimum amount of fuss, this may not be effective. Therefore if, despite your best efforts, the worst does happen and a payment becomes late there are a number of steps that can be adopted.
Under UK law it is perfectly acceptable for a business to impose an interest charge against any late payments. To maintain good relations with important customers it may be worth putting a policy in place to manage this process. For example, judge each case on its own merit, taking into account past payment history and your relationship with them. Interest charges should perhaps be applied only to those who pay late on a regular basis.
If the threat of interest isn’t effective the next step does not necessarily need to be taking the customer to court. Business Link recommends starting with more gentle methods like making telephone reminder calls. However, if the softly-softly approach proves to be unsuccessful, third party help is often available. In addition to dedicated debt collection services, accountants and solicitors can also lend a hand.
By-passing the problem altogether
Late payment is so prevalent in the small business community and indeed in the wider business arena that many thousands decide to by-pass the situation altogether. They are able to do so by signing up to an invoice finance lending facility - either called Factoring or Invoice Discounting.
Factoring is simply a way to get paid for an invoice at the time it is issued. The lender advances the amount on the invoice and then this debt is repaid when the customer pays their bill. The fees are favourably comparable to an overdraft or business loan and as the lending is on a relatively short-term basis, invoice finance is a less risky type of loan.
Companies of all sizes use invoice finance, not just to deal with late payments but to outsource sales ledger management, to stabilise cash flow and to find that vital cash injection to grow the business.
So in conclusion, if a customer or client falls behind with a particular payment you should first take into account their previous payment patterns and the potential impact of any action against a long-term business relationship. However if it becomes necessary to take action, there are a number of strategies that can be adopted including outsourcing the problem with Factoring. Legal action should only really be considered as a last resort.