The single biggest cause of small business failure in the UK is poor cash flow management, most often brought on by late payment issues. It’s therefore vitally important that you do all you can to ensure that your customers pay you on time.
Here are 7 things a small or start-up business (or any organisation for that matter) can do to ensure that late payment issues do not threaten the viability of their operation:
1. Make your payment terms clear
Ensure that all clients are told of your payment terms, and incorporate these terms into any contract signed between you and your customers. It is a good idea to print your payment terms at the bottom of any invoices you issue, as this will also serve as a reminder to whoever processes payments from the customer side.
2. Invoice promptly
Make sure you keep on top of your invoices. Many small companies are ‘too busy’ to keep track of invoice payments, but running out of cash is the biggest cause of small business failure in the UK.
Managing your cashflow should be your number one priority. Make sure you send out invoices immediately, and know when your invoices become due for payment, so you can take action against late payers.
These days, online accounting options allow you to easily create, send and track all your invoices. They can save valuable time and help you to keep a close eye on who owes you how much money. To find out more read our guide on;
3. Give customers a nudge
Issue a polite reminder if an invoice is about to become overdue, and be proactive when chasing late payment.
If you use an online accounting system, it should allow you to set up a series of automatic reminders that can be emailed or posted to customers that haven’t paid their bill.
4. Get the right contact
Make sure you know who deals with invoices at the client’s end, and be very polite when initially enquiring about unpaid invoices. One of the first things you should do when setting up a new relationship with a customer of client is to ask for the name of the person who will be dealing with payment issues.
5. Charge interest and collection fees
Don’t be afraid to charge late payment interest. The Late Payments Directive allows you to charge interest at 8% above the Bank of England reference rate (i.e. the base rate on December 31st or June 30th, whichever was the more recent) on overdue accounts.
You can can also charge a collection fee of £40 for late payments up to £999.99, £70 from £1,000 to £9,999.99, and £100 from £10,000 upwards.
Small businesses are often worried about enforcing trading terms on larger clients, for fear of losing future work. However, if you’re direct with your customers and clients from day one, there is no reason why they would switch suppliers simply because you’re asking them to keep to their side of a contractual agreement.
6. Invoice finance may be an option
You might consider invoice finance as a way of outsourcing payment collection if it is a suitable service for your type of business.
You are advanced up to 80% of the invoice value upfront, and the remainder (minus fee) when the invoice is settled. You won’t have to deal with unpaid invoice issues again, but will pay a percentage of the invoice value to the invoice financing company in return.
7. Use a debt collection agency
If you have chased payment in an orderly and polite way and have still had no joy, you could consider calling a debt collection agency to pursue the debt on your behalf, although this is often seen as a last option by many companies, who are unlikely to want to lose trade in the long term.
We have used Safe Collections ourselves several times in recent years to deal with unpaid invoices, and can highly recommend their services.
More help on cash flow and finance
You can find help and tips on all aspects of business money matters on ByteStart. Here are a few of our popular guides to help your cash flow;
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- Collecting overdue payments – a step-by-step guide for small businesses
- 10 late payment excuses used by customers – and how to deal with them
And these will help you with funding your business;
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- How peer-to-peer lending offers start-ups and small businesses a new funding option
- The secrets of getting a business bank loan
- 5 things you should know if you want to attract business angels
- Crowdfunding – a new alternative for small and start-up businesses looking to raise money
- Using Research & Development tax relief to reduce your corporation tax bill