The practice of late payments is hammering small and medium-sized businesses across the UK. This might sound dramatic, but it’s true.
A survey of 80,000 invoices carried out by business financing firm MarketInvoice indicated that 62% of invoices issued by UK small businesses in 2017 were paid late.
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 commercially and ethically wrong. However, that doesn’t stop customers withholding payments.
Nicola Roby at CHW Small Business Accountants Bolton explains further and suggests ways to encourage your customers to pay on time.
Agree terms and conditions at the outset
You should always set out clear payment terms and conditions at the beginning of your relationship with a customer. Whilst it is understandable that small businesses don’t want to rock the boat with new customers, agreeing terms from the outset will make it far easier to collect debts in the future. The larger the contract, the more important it is to set the payment terms.
As a minimum, your terms should include:
In some circumstances you may also choose to include a ‘retention of title’ clause which may allow you to retain the ownership of goods until payment is made. These are not guarantees, but in some circumstances they offer you a certain level of protection if a customer fails to pay, to enable you to recover the goods.
Keep up your relationships
A good working relationship with your customers is a must. It builds mutual trust and respect, and it also makes it a lot more enjoyable to work with them. When that connection is in place, it’s likely that customers will also end up paying you more promptly. Since they value the relationship, they’ll know that timely payments will help enhance it even more.
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.
Offer early settlement discounts
This requires careful consideration because it will affect your profit margins. For this reason, it is only viable if your business has a high net margin. However, offering a prompt payment discount, such as a percentage reduction if the customer pays on receipt of the invoice, can be an extremely effective technique. The discount would need to be sizeable enough to be attractive, but not enough to drastically affect your margins.
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% interest on top of the Bank of England base rate for late payments.
Stop supplies / ditch the client
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. For obvious reasons this would not be a decision to be taken lightly.
Nicola says “Maintaining a healthy level of cash flow is difficult enough for small businesses, without having to factor in irregular payments from customers.” To find out how CHW Small Business Accounts Bolton could help you, contact Nicola Roby on 01204 534031 or via our contact us page.
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