Posted: Tue 14th Mar 2023
Late payment can place an enormous strain on cash flow, which can stunt a small business's growth and affect its own ability to operate and pay its suppliers. Ultimately, late payment can kill small businesses.
Xero's small business insight report revealed the average length of time small businesses wait to be paid rose 0.5 days to 30.4 days in November, while late payments also jumped by the same amount to 8.1 days.
According to an analysis of SMEs, late payment is considered a problem by 56% of those who gave trade credit, with varying repayment terms causing issues for businesses of all sizes.
Here are our three top tips to avoid late payments:
Get to know your customers. We don't mean running credit checks only, but understanding the nuances of your most valuable customers will help you to identify red flags before they become a problem.
Agree with them about when to pay. Providing clear payment terms and easy payment methods sounds obvious. However, not all businesses have a clear process in place to ensure this is happening every time.
Don't let the problem escalate. Having visibility of who is paying and who is not and acting immediately if things aren't correct will reduce stress and painful discussions in the long run.
Below, we've gathered some practical tips to help you to deal with late payments and avoid them in the future.
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Set clear payment terms
Establishing clear invoicing rules for your company will help avoid misunderstandings. Present your payment terms to each new customer and consider including them on each invoice you send to your clients.
Payment terms should include, among other things:
due dates (for example, 30 days for payment)
any discounts the client may receive
information that the client will be charged a late fee for bills paid after their due date
As a business owner, you need to make sure that these terms are clear and that every customer understands your payment policy. It's also a good idea to make sure that your clients agree to them in writing – in case of later problems, you can prove who's right and who's wrong.
Issue invoices without delay
Make a habit of creating invoices immediately. Issue and send the invoice as soon as you finish the negotiation with your customer. This will reduce mistakes on the document and your client will remember what the invoice/payment is for and help to speed up the payment process considerably.
However, if you do happen to send a late invoice, it's a good idea to send the customer a short message apologising for the delay. Your client will appreciate the fact that you care about them and respect them.
Include important information on the invoice
Often, your customers can fall behind with payments due to errors on invoices or lack of proper information. Consequently, clear professional invoices are key.
Make sure the client can find all the necessary information on the document, such as:
your and your client's data
details about services and their prices
the amount due
Also, don't forget to add your contact information so that if there is a problem with the payment, your customer can contact you quickly and easily.
Double-check that all the data on the invoice is correct. Also, make sure you send the invoices to the right person - it may happen that the buyer would prefer you send them straight to their accountant.
Provide many payment methods
Payments can cause a lot of problems. It's a good idea to give your customers the ability to choose from various payment methods.
There's a chance that by offering more payment options, you can get paid faster. Include information about available payment methods in your terms and conditions so your customers know how they can pay you.
By switching to online payment options and providing your customers with a link to online transfers or credit card payments, you could get paid instantly.
It's also worth setting up a direct debit or connecting a credit card if you're using recurring payments. The money will be collected automatically, and you won't have to worry about late payments.
Provide discounts for fast payers
Offering discounts for quick payers can build customer loyalty. It seems like you are not just profit-driven and you care about your clients. By rewarding fast payers, you'll make your customers used to paying early.
However, before you implement this tip, review whether you can afford to give discounts.
Also, be careful not to give the same deal too often and for everyone – discounts will then lose their value. You can't get your customers used to getting a discount every time for no reason.
Require advance payments
We're used to paying in advance for most of the services we use, such as gyms, classes, conferences and so on. But as business owners, we rarely request advance payments.
Consider introducing advance payments as a general rule and deal with exceptions when required.
Require partial payment upfront
Break payments into instalments to get paid for each part of a bigger project on time. This is especially useful for long-term projects – clients will get more payment reminders and are more likely to pay in full.
Generate monthly financial statements
As you can see who is paying you and who is in the red, you can establish communication lines with the customers you want to retain.
Keep detailed documentation
Keeping records may be time-consuming, but it's essential if you want to maintain control over your business transactions.
By retaining documents, both you and your client have everything written down on paper and you can always go back to it. If any problems arise, you have written evidence to correct any statements.
Valuing loyalty by extending support in difficult times is key for businesses to attract a high percentage of returning customers.
In difficult times, some small businesses will tend to bury their heads in the sand. To avoid this situation, it's important to identify those customers you want to retain and protect from the competition and discuss their situation and negotiate payment plans, extensions and deferred payments.
This action will generate a strong bond with your customer and it's likely they become an advocate of your business.