Clients that don’t pay are every business owner’s worst nightmare. As I’m sure you’ll agree, there’s nothing more frustrating than having to chase clients for money that’s owed to your business. Unfortunately, it’s no secret that the business suffers from a payment problem, with SMEs across the country owed a huge 23.4 billion owed in late payment debt.
In fact, the problem is so rife, that just last month the government implemented reforms to the Prompt Payment Code. Originally created to ‘set the gold standard in payment terms‘, the code aims to bring a culture change to payment practice.
The latest reforms have reduced the time signatories have to pay their small suppliers from 60 to 30 days, and reinforced the right for businesses to charge statutory interest in the event of delays.
But with just over 2,000 signatories out of the 5 million businesses trading, there is clearly a long way to go. So in the meantime, how best can you protect your business against overdue invoice payments? We share our tips.
1. Create a contract and be clear about payment terms
Many businesses make the mistake of jumping into work with clients without mutually agreeing on payment terms. An informal discussion is unfortunately not enough in this day and age. In order to protect your business, you need to set out a contract and make sure your customers sign it.
Remember that an invoice is not a legally binding document, whereas a contract is. In your contract you should outline the rules of doing business, as well as provide clear payment terms and expected timeframes by which you expect to receive money owed.
2. Take time to set up a payment schedule
You should always make sure that you stay on top of your customers’ invoice payments. For starters, don’t delay in sending out invoices. Do so as soon as the work is complete or products have been received. This will help to shorten the gap between project completion and project payment.
It can be a good idea to also send out friendly reminders and check in with customers roughly 7 – 14 days after issuing invoices. Email reminders should include options for easy payment.
3. Offer customers incentives for early payment
Many businesses opt to provide discounts in exchange for early payment. Offering a 1-2% discount can incentivize quicker payment terms and encourage customers to return for future transactions.
If offering a discount isn’t your preference, consider alternative incentives like a coupon code for a future purchase or a small freebie that won’t strain your business financially. Additionally, to enhance convenience for customers, consider offering alternative payment methods such as online payments or ACH transfers. This simplifies the payment process for customers, making it more likely for them to pay on time.
4. Don’t be afraid to charge late payment fees
A surprising number of business owners choose not to collect overdue invoices. According to research, a huge 76% of small businesses are worried about taking action against late payments. But this should not be the case.
Legally, all businesses have the right to charge statutory interest fees set at 8% in addition to the Bank of England base rate. If you intend to do this (which you should), be sure to outline late payment fees in both your contracts and invoices.
Open communication is the way to success, and discussing these terms with clients beforehand can go a long way in ensuring that problems don’t arise later down the line. Often, warning customers that you plan to seek legal action can be enough to encourage them into making payment.
5. Sell your customer invoices in advance
Another option that more and more small businesses are turning to is invoice finance. With this type of finance, business owners can choose which customer invoices they want to sell in advance. In return for a small fee, companies get access to the money that’s owed to them in a matter of hours, if not days.
This solution speeds up lengthy payment terms and eliminates the stress of chasing for overdue invoices from customers. Lots of businesses don’t feel comfortable with continuously pursuing money owed, and many don’t have the time. In these situations, seeking invoice finance from a trusted provider can be beneficial.
In conclusion
Though navigating the road of customer payments can be tricky, it’s important to remember that there are steps you can take to make your business’s life easier. If you haven’t done so already, spend some time implementing the following strategies to ensure you have a smooth payment practice in place moving forward. Best of luck!
