How small businesses can deal with late payments

Talk to any business owner and it is very likely that they will have been affected by the late payment of an invoice at some point. 

Research by QuickBooks has revealed small and medium-sized enterprises (SMEs) are owed on average £27,214 and estimate one in six invoices are overdue. Furthermore, around 40% of SMEs agreed that if late payments continued, businesses could be forced to close in the next year.

Unpaid invoices can have a significant negative impact on a business’ cash flow, so what can a business do to reduce the chances of late payment?

Research your customers

If your customers are other businesses, checking a potential client’s credit history to find out whether they have a record of late or missed payments can give you the heads up on any potential problems. 

You need to convert leads to sustain and grow your operations, but that doesn’t necessarily mean you should agree to do business with anyone who comes through the door. Untrustworthy customers can quickly start costing your business dearly. 

State your terms from the start

Agreeing payment terms with your client before you start delivering work means you can prepare for the impact on your cash flow. 

When it’s time to issue the invoice, make your payment terms very clear so there is no confusion. 

If there is the option for clients to pay in instalments, make sure you clearly outline how much the client needs to pay and by when. 

Issue prompt and accurate invoices

Send your invoices as soon as work is delivered (or sooner if it’s part of the agreement). Make sure invoices are accurate and contain all the necessary information, including bank account details for payment. Making a mistake or leaving off important details could delay the payment, particularly if a busy accounts department doesn’t let you know about an error in good time. 

For business-to-business arrangements, the Government website says invoices should include:

• a unique identification number
• your company name, address and contact information
• the company name and address of the customer you’re invoicing
• a clear description of what you’re charging for
• the date the goods or service were provided (supply date)
• the date of the invoice
• the amount(s) being charged
• VAT details if applicable (the amount of VAT charged, your business’ VAT number and a breakdown of the amount of VAT charged for each item on the invoice)
• the total amount owed

If your client requires you to include a purchase number, make sure you get the number in advance and include it on the invoice.

Using invoicing tools provided by online accounting software companies like Xero and QuickBooks can help to ensure accuracy of invoices and speed up the payment process.

Make it easy to pay

You should make it as easy as possible for your clients to pay so they don’t have the excuse of not knowing how to do it. 

Make sure your full bank details are included on all invoices or offer other options such as online payment services like PayPal. 

If you are collecting regular payments from customers, using direct debits is a good solution. You may choose to arrange with your customers to spread the cost of your product or service across the year. This may encourage them to pay on time, and mean more customers spend money with you and increase customer loyalty. 

Build good relationships

Developing strong and friendly relationships with clients can help to minimise late payments. 

For businesses providing products or services to other businesses, invoicing is often an anonymous process with email generic accounts@ addresses. 

Try to get the name of an actual person who you can speak to if there are any problems or delays. If you’ve built a good relationship with an individual and they can put a face or voice to the name, it will make it harder for them to let you down and pay late. 

Being a small business can be used to your advantage too. Larger companies may not realise the impact on smaller companies of paying a bill late. If you develop a good personal relationship with your client and they know you are running a small business, they might prioritise your payment. 

If you have consumer customers, you should also maintain a good relationship through regular communication as well as being clear about how much you charge and when you expect payment. 

Send regular reminders

Regular payment reminders will help to ensure you are paid promptly. Payment deadlines being missed can sometimes be due to a technical error or because the invoice has been genuinely missed. In those cases, a quick call to chase might solve the issue. 

Some businesses process bulk payments at the end of the month so it may be that they are waiting until the end of the month to pay your invoice. 

When chasing a payment, be polite but get straight to the point. Give them all the information they need such as the invoice number, the date the invoice was sent and when the payment was due. 

Speaking on the telephone rather than sending an email can be beneficial as you’ll know for sure that the customer is aware that your payment is late. 

You can also automate the reminder process by using online accounting software, such as Xero or QuickBooks. 

Debt recovery 

If a customer still fails to pay despite all your efforts, you may need help from a debt recovery agency.

TaxAssist Accountants works with several suppliers of debt recovery services that specialise in an efficient and cost-effective cash collection service.

They can offer advice and manage either individual invoices or your entire sales ledger.

Through skilled mediation and professionalism, the suppliers can recover your debts and safeguard valuable relationships so future business opportunities are protected.

Monitor persistent late payers

Staying on top of those customers who often pay late is an important part of managing your cash flow.

Understanding customers who regularly miss invoice deadlines will help to ensure you identify any potential cash flow gaps and take steps to find other business opportunities to deal with it before it becomes a serious problem.

By using online accounting software and working with your accountant, you can use aged debtor reports to identify which customers owe you money and how much they owe.  

How we can help

Late payments have a negative impact on cash flow. If you need help with managing your cash flow, call us on 0131 659 5888 or use our online enquiry form.

Date published 22 Aug 2022 | Last updated 21 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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