Top tips to avoid slow payments

Chasing slow paying clients is a burden that all businesses share at one point or another. Out of control accounts put a huge pressure on a business’s cash flow, particularly for Small and Medium Enterprises (SMEs). The Federation of Small Businesses (FSB) has released data that shows that around 50,000 small businesses close each year as a result of late payments. Research showed that last year alone there was a cost of £4.4 billion collecting money owed, with around £23.4 billion owed in total to SMEs. According to digital banking platform, Tide, this is resulting in UK SMEs spending an average of one and a half hours a day chasing unpaid invoices!

Now, although these statistics are a little depressing, it is not all doom and gloom! There are effective ways to improve your credit management and increase your chances of swift payments from clients.

Let’s dive in:

Get to know your client!

No, we aren’t talking about finding out their favourite colour… Credit reference reports are the sensible start point and the quality of information continues to improve with many credit agencies. They all offer a monitoring service advising of any changes to the financial status of your customer – not just a one-off ‘as it stands’ on a particular date. Most are also now including some sort of predictor of likely insolvency and even now incorporating a Covid-19 vulnerability assessment. All the same, there is no point in having this information without using it and that may mean reducing or removing a credit limit if the information shows a deteriorating risk.

A completed and signed credit application form has always been a sensible requirement too. These days it’s all the more important that it should contain contact details for accounts payable contacts who may be working remotely – name, mobile phone number and direct email address. It’s a good idea to get in touch with this contact when opening a new account to see how you can present your bill in a timescale and format that will allow your bill to be paid. It’s not much use chasing an unpaid account only to find that you missed the month end cut off date and aren’t even on the payment run until next month.

In addition to the above, if you have trade credit insurance you can utilise the knowledge of your insurer! Insurers often have additional knowledge on companies (for example; payment performance data from the insured supply chain or current financial information) so if insurers are reluctant to provide cover for a particular customer then you can take this as a red flag before considering credit.

Ultimately, it is your choice to issue credit terms to a client. If you are not sure on a new client’s ability to pay credit in a timely manner, it is better to require payment upfront than risk late payment. If over a period of time they prove trustworthy you can always re-approach the idea of credit terms then.

Set payment terms and spell these out!

Payment terms are not a one size fits all solution. This being said, you should identify what your standard payment terms are and work to implement these as often as you can. Averagely, businesses trade on 30-45 days terms. This allows your client time to pay you the funds but is a short enough period that it won’t negatively impact cash flow and it is less likely to be forgotten in a pile of ‘low priority’ paperwork on your client’s desk!

You should be clear and precise in your wording, add your credit policy to bills and invoices along with your late payment consequences. State an exact date in your wording on bills/ invoices instead of using generic phrases such as “due in four weeks”. In addition to this, you can add your ‘late payment policy’ onto them, stating that you will charge a late fee for invoices paid past their due date. This should help push slow moving clients into paying more swiftly.

Do review your terms and conditions

We still come across companies who have copied and pasted terms and conditions or haven’t reviewed their old terms and conditions of sale for many years. These terms and conditions are the contractual basis on which you are asking a customer to pay you for the goods or services you provide and are worth reviewing on a regular basis.

It may cost a few hundred pounds, but it may make the difference between a collectable debt and an uncollectable debt.

Be consistent and polite

It is good practice to review your outstanding invoices weekly. If you do this, you can develop a process for following up on payments that are late. Don’t be afraid to send a friendly reminder to the client a week or so before payment is due either – It’s a chance to touch base with the client, keeping yourself on their radar and increasing your chances of getting paid on time.

It also pays to be warm and friendly in your invoices. At this point, the client hasn’t paid late yet and by being pleasant, customers will respond more positively to you and as a result increase your chances of being higher up the priority list! According to a report by FreshBooks Data Analytics, simply adding a ‘please’ or ‘thank you’ to your invoice can increase your chances of getting paid by five percent!

Be flexible, but don’t indulge bad habits!

Credit limits and payment terms are important to set the ground rules for yourselves and your clients. This being said, it doesn’t mean there should never be a little give and take. There are times when a client will hit financial difficulties that no one could have seen coming and it’s OK to work with your clients in these times, you just need to make a judgement call on whether this is habitual or situational – You do not want to be indulging the habit of late payment!

If a client is in a sticky situation, it helps not only them but you if you work with them to find a solution. You can look to offer clients instalment plans – Although you won’t receive your full debt upfront, this will allow the client to pay you back over an agreed period of time and you will get your money in the end. Developing a suitable payment plan with a struggling client is often the difference between getting paid or not getting paid at all… We know which we’d pick!

However, be aware – during a recent presentation by Experian, they linked payment performance to their risk rating and showed that the companies who are slowest to settle their invoices are the companies showing the highest risk of potential insolvency. If you are going to be flexible, make sure you are being flexible with the right customers.

We hope you found this blog helpful and if you would like guidance on how to further protect your trade credit, we’d love to hear from you!