Chase late payments

What are the steps? 

1. Send out First Payment Reminder Letter

2. Follow up with a Second Payment Reminder 

3. Issue the Final Payment Reminder Letter 

4. [Optional] Consider using a law firm to issue a letter before action

5. [Optional] Follow up with legal action and potentially a claim in court.

Introduction

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 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 organisations, who either by financial design, or because of lengthy internal procedures sit on unpaid invoices for too long. Use Zegal to set up an efficient and formal late payment process. 

Have Clear Payment Terms

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.

If you’re issuing an invoice or purchase order, ensure the payment terms are clearly communicated on these documents.
You can use Zegal to draft these documents if that is not the case:

Need to draft one now?

If you are using a Sales of Goods Agreement or a Supply of Services Agreement, ensure they contain payment term clauses.
You can also use Zegal to draft these documents if that is not the case:

Need to draft one now?

How to do it 

Step 1: Send out First Payment Reminder Letter

To inform your customers of overdue payments, a courteous but formal notice should be sent out as soon as an invoice or payment is past due. One that is sent out on a regular basis and using a standard process can take much of the emotions out of the collections process. This can also take the form of a First Payment Reminder Letter.

Step 2: Second Payment Reminder Letter 

Debt Collection Letters are the first step in the debt collection process. These can be a useful and affordable way of chasing up overdue invoices by prompting a customer to pay the overdue amount.  This is usually repeated 2 or 3 times before escalating the process.

Step 3: Issue the Final Payment Reminder / Debt Collection Letter

Escalate the situation by issuing a Final Payment Reminder or Debt Collection Letter. At this stage, you should also send a copy of the letter by postal mail unless alternative methods of communications have been explicitly agreed. The gravity and intention of debt collection is further communicated when sent by registered mail.

Step 4: [Optional] Consider using a law firm to issue a letter before action

Finally, issue a Letter Before Action as a formal notice that you intend to pursue this matter in court. This is a non-binding communication but nevertheless very effective.

In addition, you may consider instructing a law firm to issue the letter on your behalf as the first step towards legal action.

Step 5: [Optional] Follow up with legal action and potentially a claim in court.

If none of the above has worked, you may need to pursue legal action and file a claim in court. Your lawyers will be able to advise the best course of action.

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.

For more guidance on creating an invoice, please see our Invoice page. 

Where possible include:

• 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;
• Your terms of sale – if you don’t have any in place just yet, you can read more about supplying products here and supplying services here.
• 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.

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.

You can find all the resources to set up your formalized late payments process here.

Client case study

Stella Pe from Pacifictrust Holdings uses Zegal to set up an efficient and formal late payment process.