Late payments are one of the scourges of the UK economy. That might sound dramatic, but it’s true. The small business commissioner estimates that British SMEs are owed more than £26bn in late payments, and it’s costing them millions of pounds more to chase these tardy debtors.
Whatever way you look at it, paying for a service or a product that has been successfully delivered, outside of the agreed payment terms, is both commercially and ethically wrong. However, that doesn’t stop some from employing bully-boy tactics, including withholding payments.
Maintaining a healthy level of cash flow is difficult enough for small businesses, without having to factor in irregular payments from customers. To remove this additional worry, we’re going to take a look at four strategies you can use to help get your clients to pay on time.
1. Always include terms and conditions
You should always set out clear payment terms and conditions at the beginning of your relationship with a customer, and make sure you get them signed off. It’s perfectly understandable that small businesses don’t want to rock the boat with new customers, but agreeing terms from the off will make it far easier to chase debts in the future. The larger the contract, the more important it is to set the payment terms.
At the very least, your terms should include:
The credit period
A clause that outlines your right to charge interest on late payments
A signature to show acceptance of the terms
In some circumstances you may also choose to include a ‘retention of title’ clause. This may allow you to retain the ownership of goods until payment is made. These are not by any means guarantees, but in some circumstances they offer you a certain level of protection if a customer fails to pay, so you can recover the goods.
2. Ask for part payment upfront
Asking for part payment upfront can help to keep cash flow at healthy levels and get a financial commitment from the customer. For example, you might choose to ask for 30 percent payment before the goods are dispatched or services performed, followed by the balance 30 days after receipt of the invoice.
3. Offer early payment incentives
This strategy warrants careful consideration because it will eat into your profit margins. For this reason, it is only viable for small businesses with a high net margin. However, offering a prompt payment discount, such as a 3 percent reduction if payment is received on receipt of the invoice, can be an extremely effective technique. The discount should be sizeable enough to be attractive, without putting too much of a dent in your margins.
4. Wield a big stick!
Some customers will push their luck even when they have more than enough money in their account. For clients who consistently pay late and waste your time by making you chase, it’s essential you have potential methods of recourse you can take.
Charging interest on late payments is one method of penalising customers who do not stick to the deal. Government legislation allows you to charge up to 8 percent interest on top of the Bank of England base rate for late payments, so make sure you do. Alternatively, simply refusing to do any more work for the client until payment is received can spur them into action. In some cases, it might even be better to cut your losses and refuse to work with them again.
To find out how KPMG Small Business Accounting could help free up your time so you can concentrate on business success, request a callback for a quote today.
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