For smaller businesses, cash is very frequently king. Because of this, late payments have an outsized impact on small companies.
A few bills paid late or on extended credit terms can mean that your financial cushion is removed. In the worst case, it could mean not being able to pay your fixed cost (think employees and rent).
The sad thing is, almost half of the small to medium-sized businesses are being paid late, with the average being £32,185 in overdue payments, and nearly half of companies with bad debts are spending up to four hours a week chasing bill payers.
That’s a massive inefficiency and only aggravates a company’s costs further. For the majority of these companies, it’s also the same drill; phone calls (repeated conversations); and emails. With no sure outcome.
On certain occasions, the exposure may be too great to write off. This is particularly so when a company has one or a few major clients, responsible for a large proportion of income.
For example, a consulting business with one major client like a bank will quickly find itself in big cash trouble, if the bank decides to pay late. Sadly this happens all too frequently for consultants that consult for large organizations, who either by financial design or because of lengthy internal procedures sit on unpaid invoices for too long.
What are the steps?
Step 1 – Determine if your team is spending time chasing late-paying customers?
Step 2 – Make sure that your customers are clear on payment terms from the start and that there are penalties for late payment. Use contracts that are clear on this from the get-go to show that you are serious about this.
Step 3 – Use Zegal to set up a formalized late payment process
Step 4 – [Optional] Consider using a law firm to issue a letter before action
Step 5 – [Optional] Follow up with legal action and potentially a claim in court.
What details should be included in an invoice?
Before you start chasing late invoices, you really need to be sure that you have the comprehensive basics in place. Chasing a late payment that didn’t have a date on it in the first place, or because the bank account number is missing, makes your organization feel less professional at best, and at worst means you will be making enemies in your customer’s accounts department.
Everything that matters about your business – so your company name (and trading name if that’s different), your logo, registered address (and your contact address if that’s not the same), and company number if you have one;
Full details of the product, and if applicable any goods and services tax (eg VAT) that are added on top. These must be a separate line item and clearly marked as tax.
Your reference number for the product or service. This is sometimes referred to as your SKU number or Product ID. Whatever it is – make sure it is clear and either lists the quantity sold (for products) or the amount of time spent (for services).
The amount due – this one is rarely missed but worth reiterating!
The invoice date and number – again this is essential since this is the date from which your payment terms run. You can read more about payment terms below.
The customer’s name and address
Your payment details. The most important item on your list! The easiest guaranteed way to get paid late is not to include a clear and simple method (or methods) of payment. It is by the simplest way for a business to delay paying you.
If relevant, and you are charging service tax on your invoice, your tax registration number should be included on the invoice.
How many days should customers have to pay an invoice?
This question is somewhat driven by industry practice, but the fact is that most smaller companies default to the standard net 30 days or end of the month following whenever they issue an invoice. In the case of the end of the month following, a customer, in reality, gets up to 60 days of credit before you can even start to classify the payment as ‘late’.
Clearly then the easiest way to tighten up the payments cycle is to take a good look at the payment terms themselves. Will shortening the terms to 15 days or even 7 days have a material negative impact on how customers view you or would this in fact be quite an acceptable change?
Are you dealing with a much larger customer and you must follow their trade terms? If so, you may not be able to reduce the number of days but you can make it very clear in your terms that you will levy additional fees or interest on late payments to cover the risk of unacceptable delay.
Be sure you are using Zegal contracts not just at the stage of handling late payments but all the way through the commercial lifecycle so that you are controlling the way your business is run whenever you can at every step.
Give your customers regular reminders
Often what customers need is simply gentle reminders. You should absolutely not be sending formal or threatening letters to a customer who is a few days late, or whose credit card may have been lost.
You can automate this process almost entirely these days with tools that are available to work either through your CRM (for example Hubspot does a really good job of this with its tickets functionality) or from your online payment provider – for example, Stripe and Xero have automated email reminders for failed or missed recurring payments
What if none of this helps or the debt is much larger?
There will be times when even with agreed contracts, a clear invoicing process, and an automated system for invoice reminders, that bills will remain outstanding and there has to come a time when enough is enough.
At this point, you can use the Zegal late payments process. This clearly set out process helps you send formalized payment demands to your debtors to settle their outstanding bills quickly.
You can think of this stage in two ways:
One is that very hopefully this change in tone will help drive home the message that it’s time to pay.
The second is that this formal tone is critical to have in place should subsequently need to go to formal legal action. You will be seen to have done everything possible pre-action (before the legal process) and so that will reduce the work (cost) your lawyer has to go through to begin debt collection.