Your business venture utilises an invoicing system and it has run into the issue of late payment, or possibly even non-payment. You are not alone here as this is a common problem within the world of business and one that causes serious damage to cashflow, the health of a company, and can even lead to the end of an organisation.
We want to show you what you can do to turn this tricky scenario around and ensure that your customers start paying on time.
43% of SMEs experienced late payments during 2018 and it is estimated that £13 billion is suffered in late payments by SMEs in total. This can cause huge amounts of financial distress within a company of any size, particularly a small business.
Whatever the circumstances are, or regardless of what the reason for it is, an unpaid invoice will always hurt your business. You need to act fast to ensure you stop the problem before it spreads and becomes even more difficult to deal with. You will need to be prepared to be candid with customers and have a series of backup strategies in your pocket if the first thing you try doesn’t work out.
How to collect overdue payments
Here are a handful of methods you can utilise when trying to retrieve payment from a customer that has failed to pay on time. Remember that your business’ life hangs in the balance here, so you should take all the measures needed to ensure you get the cash you rightfully deserve.
Discuss payment terms before beginning a project
Before you agree to taking on any form of work for a client or customer, you need to have a chat with them and discuss exactly what the costs are, how they will be paid, and perhaps most importantly when they will need be paid. By performing this action, you will gain a furthered level of understanding and get an early grip on the level of trust you can place in your client. This will inform you of whether you need to insert any early payment clauses, or if you need to take a percentage of the payment upfront, etc.
The key aim with this is to make the client perfectly clear on what they need to pay and when. To encourage this, you should list as many possible payment methods as you can and give your customer options that help lean them towards making timely payment.
Bill for work upfront
Indeed, we have already touched on this point briefly, but getting paid upfront gives you the certainty that you’ll receive cash for your work. This is a great method for those business owners that believe using an invoicing system is too risky and want a guarantee that they’ll be paid. This is the only way to be 100% sure that non-payment will be avoided.
However, there is a major issue with this method. Your customer may be equally wary of you and have distrust that you’ll complete the agreed work after getting hold of their cash. As you can see, being paid upfront really is a two-way street.
Therefore, the best way of starting this payment method is to contact previous customers about it, who already trust your business venture, and getting them to sign up for it for later projects.
Send invoices as soon as possible
As a small business owner, it can occasionally be difficult to lose track of what you need to do next, as you likely have so much on your plate. As the jobs pile up, so does the headache of keeping up with your daily tasks, such as sending invoices.
Try to remain on top of this and send invoices as soon as you can, not only will you then be able to refer to them if the client tries to get out of making payment, but you’ll also be encouraging your customers to pay faster.
Be persistent with late payers
Do you sometimes think you are being too harsh on late customers, as you constantly bother them about making the payment they owe to you? Well, if you do, you need to change your way of thinking. You must remain persistent with those that pay late or refuse to make payment full stop.
If your customers won’t answer emails, try calling them, and continue to call each day until you receive a response. You must keep up your efforts to contact them as frequently as possible; you are owed money and you have the right to go after it.
Begin charging late fees
One effective way of ensuring you are paid on time by clients and customers alike is to charge them late fees. This basically means that if they are late with their payments, they will owe you more. Ensure that these are put into place before the agreement is signed, as it would scare customers into timely payment if they previously imagined they’d be able to get away with any shenanigans.
Set up a payment plan
Perhaps a customer of yours has run into financial troubles of their own and can’t afford to pay you upfront. This doesn’t need to be the end of the transaction before it has even begun, as there are ways to handle this sort of situation. Remember that you cannot afford to by missing out of business opportunities if you want your venture to succeed and grow.
Instead of saying goodbye to the project that will ultimately make your business money, you should instead develop a payment plan for your customer. This will be useful in ensuring that you are paid within a timeframe that suits your company’s financial needs. As part of this plan, you should negotiate an amount the client can afford and specify over what period of time payments will be made.
What can I do if a customer won’t pay?
First, you should trust that most of the time a late payment stems from an honest mistake of the customer. They likely forgot all about it, and a slip of the mind is something common throughout all people. Thus, you should head into your enquiries with good intentions, believing that after sending a polite reminder, you will get the payment that is owed to you.
However, in some cases, clients will try to delay payment and make up excuses as to why they have failed to transfer the funds on time. They might say that they lost the bill, that initial payment has failed for some reason, or that they need to check their records to ensure they’re paying the correct amount.
In this instance you should send over an updated invoice instantly and ensure them that they need to make payment right away. This will eliminate many excuses they may have first had, even if you know they are lying.
If beyond this point the client still refuses to pay, listen to their reasoning, but stay firm throughout the proceedings. Your main goal here should be to reach a solution that pleases both you and the client in question, so don’t be afraid to ask them why they have run into complications and failed to make payment up to now.
If your calls and emails are being ignored by a customer, you should take a firmer approach to collecting payment. You can give them an ultimatum: either pay now or deal with the consequences. If necessary, resend your original contract, indicating that you will escalate the situation if invoices remain past due.
Now it’s time to write a demand payment letter. This is a formal letter that outlines the debt owed to you and states what will happen if the debt is not paid by the designated due date.
At this stage you should not shy away from threatening legal action and using strong language to get your point across effectively. This may seem out of character to you if you aren’t used to doing so, but once the payment date has passed, and your polite requests have been ignored, you need to take serious action.
Bringing in help from outside your company
If you have repeatedly attempted to contact the client, and failed in collecting payment, it is time to get help from elsewhere. Here are the two options readily available to you today:
Debt collection agencies specialise in chasing up late payments that are normally over 90 days past their due date. These services take the burden of continuing to chase late payment off your hands and utilise unique methods of getting the customer to pay. This may prove to be the ideal method for you to finally get the money owed to you from a non-paying client.
Factoring services can help to put cash back into your pockets while you are waiting for clients to make payments. This means that if you are worried about a lack of funding due to late invoice payments, your balance can be topped up regardless.
When using a factoring service, you’ll sell your accounts receivable to a company for a percentage of the accounts’ value (normally between 70% and 90%). The lender will then advance you the money within 48 hours. After this point, the factoring service will collect your customers’ payments and send the rest of the cash to you, minus a previously agreed service charge.
You should be aware that factoring services are not collection agencies, however. They run a credit check on your customers before agreeing to purchase any invoices from you. If you use a factor for multiple customers’ invoices, the service fees add up. Therefore, you must be careful and approach with a level of caution, being completely sure that it will be worth it for you in the end.
How to take legal action for non-payment
If the debt is significant enough, you should consider taking clients to a small claims court or hiring an attorney to deal with the situation on your behalf. These are the options available to you within this area:
Hire an solicitor
If a client owes you a large sum of cash and refuses to pay you or a collection agency according to the terms of your contract or invoice, a claim in the county court may be necessary. If taking legal action is the road you wish to travel down, consult with an solicitor before proceeding and take in all their advice.
Take clients to a small claims court
Another possibility is to take clients to a small claims court. This is never a fun process and requires an awfully lot of work, including filing a complaint, preparing your case in advance, and collecting a judgement. But it can be effective in the right scenarios. However, you should be aware that this is often not the most cost-effective approach, so please be prepared for things to get pricey.