A recent survey shows, once again, that late paying customers remain the biggest single threat to the health of the UK’s small businesses. Here, we provide some tips on how to avoid late payment problems.
It doesn’t matter if you have the best ideas, the most innovative products, or most satisfied customers, if your business runs out of cash. This is the most common reason for businesses to go under, and in many cases – it is preventable.
A poll of hundreds of company directors by CashFlowFacility this month highlighted the ten most common reasons why small firms suffered from cashflow problems.
Heading the list was late paying customers, followed by overdrafts being frozen, unexpected tax liabilities and the cost of new machinery or equipment.
Other common cited by respondents included; slow funding decision making by banks and legal bills.
How to avoid late payment problems
Beefing up your cashflow management procedures is one of the most important measures you can take to protect your business from late paying customers.
Here are some tips from the Bytestart team:
1. Clearly state your payment terms on all contracts and invoices. Standard payment terms are usually 30 days.
2. Make sure you submit or post any invoices to the right place. This may sound obvious, but you do need a specific point of contact, and an agreed method of communication (online invoicing, email, or post).
3. Once invoices are coming up to their due dates, don’t be afraid to issue a polite reminder to the customer or client. Once the due date has past, follow up with a polite email, or phone call, and always be aware of what sums are owed to your business at any one time.
4. Consider investing in online software such as FreeAgent, which will provide you with a snapshot of all your outstanding invoices at any point in time.
5. Under the terms of the Late Payment of Commercial Debts (Interest) Act 1998, and Late Payment of Commercial Debts Regulations 2002, you are perfectly entitled to charge interest on any late payments at a rate of the Bank of England base rate + 8%. Find our more at PayOnTime.
6. You could consider using a factoring company, who would effectively buy the value of your invoices, in exchange for a fixed percentage fee.
7. Although you shouldn’t have to, you could provide incentives for early paying customers, such as ‘pay by x date, and receive 5% off your next order’.
8. As a last resort, you may need to use a debt recovery company when all other attempts to secure payment have failed. We have recommended the services of Safe Collections for many years.
For more ideas and tips on maintaining a healthy cashflow go to ByteStart’s dedicated CashFlow section.