One of the biggest problems UK business directors are faced with is finding ways of making sure that their clients pay their invoices on time.

In this article we’ll talk you through some strategies for doing this, and keeping your working capital cycle healthy.

Getting your Invoices Paid on Time is Essential to Your Cash Flow.

The reality is that if an invoice is paid late occasionally, then this would not pose a real problem to the financial security of an SME.

However, when this begins to become a frequent occurrence,  serious ramifications are felt by businesses, particularly those who are expanding and taking on more work, as they struggle to balance their cash flow and keep account books in the black.

In an ideal world, all businesses would be honest when dealing with each other, contractual arrangements would be upheld and invoices would be paid on time. However, this is not always the case and as such it is important that you are aware of the measures to take in order to minimise the risk of having your invoices paid late.

Below we will look at how businesses directly contribute to their clients making late payments and the best measures to take in order to minimise the chance of your clients making late payments, so that you can move forward in the future secure in the knowledge that your cash flow is consistently positive and in line with your forecasts.

Why Do Companies Get their Invoices Paid Late or Overdue?

Below is our list of the most frequent reasons why companies are paid late, and the typical mistakes made by company directors that directly contribute to their clients paying their invoices late.

If you believe that any are applicable to your own business, then look into rectifying these straight away in order to avoid cash flow problems in the future.

A lack of organisation over credit policy

This is a frequently cited reason given by business owners for why they have ended up receiving late payments from their clients and is a testament to how important it is to have a clear company credit policy in place as soon as your business starts trading. Ensuring you have a clear credit policy in place that all of your staff are aware of is integral to ensuring that there are no disagreements with customers over payment later on down the line, as their repayment procedure will be identified in clear terms. 

Big businesses abusing their power

Obviously it is hard for an SME to reject a lucrative business offer from a large company though it is worth being aware that you are at risk if you place all your eggs in one business basket. 

A supplier undergoing cash flow problems

This can often lead to them requesting payment of their own invoices early, but paying your invoices to them late. It is worthwhile looking into any public disclosures of your trading partner’s finances so that you can clearly ascertain whether they are reliable debtors. Ask for references too. These simple tasks  will ensure that you minimise the chances of getting paid late right from the start of your contractual arrangement.. 

Inefficient internal invoicing system

This can be caused by a having a number of administrative staff who do not have sufficient training or by using an outdated invoice software system. Essentially, you will want all of your staff to be aware of your credit policy, how to review it and how to charge for late payments. You will also want them to send invoices out as soon as a clients payments become due, so that you get paid quicker. Being efficient with your invoicing and optimising your repayment collection practice with your clientele is vital to preventing cash flow problems. You should also use an online/cloud based invoicing system, so that you are instantly alerted when a payment becomes overdue and can begin to apply the pressure from an early stage. 

7 Ways to Minimise the Risk of Late payment From Clients

  1. Get to know your customers well. Make sure that you are in contact with the person who is tasked with processing invoices on your customer’s side and get to understand their own invoicing policy. Come to a fixed payment arrangement with them that suits both parties. A good approach to adopt would be suggesting that they make their payments within 30 days of billing, as you will often have to pay your wage and supplier bills on the same basis.
  2. Do not accept requests to have a payment arrangement that involves cheques, as this often provides clients with an easy way to employ avoidance tactics. Instead, ask if they are prepared to enter onto a direct debit scheme that would consist of money being taken from their account on a fixed date each month. You could even incentivise the direct debit form of payment through a discount or a perk, because the security of knowing that you will receive a fixed sum every month has so many benefits for both parties cash flow.  
  3. Agreeing an interest charge for overdue payments within the initial contract could also be a natural deterrent to making late payments for your clients, and you are legally entitled to collect interest from a debtor who defaults on their payment.  
  4. Do a credit check on potential clients. You can make an enquiry to one of the major credit agencies such as Experian or Equifax and acquire a customer’s credit history at a relatively low cost. Whilst you should take into account  the risk ratio irrespective of a customer’s credit file, you should still analyse how they have managed their finances in the past, and whether they are likely to adhere to a payment arrangement that necessitates a fixed sum to be paid to you each month. Alternatively, some banks offer limited credit checks on individuals, so you can make an enquiry and make your own value judgements about whether they will be a reliable and profitable customer.   
  5. Be efficient with your invoicing. This might seem obvious but a recent study by Exact Cloud Solutions, astonishingly revealed that businesses across the country have lost a monumental £3.7 billion in the past year due to a failure to send invoices out for completed work. As such it is pivotal that your staff are on the ball at all times when it comes to processing invoices, and have an efficient and clear bookkeeping system that alerts them of whenever a payment becomes due. Rob Klijsen, acting general manager of Exact Cloud Solutions said: “SMEs provide a service or product but then they forget to send an invoice. The business owners focus all their attention on doing the business and not so much on the financial processes around it”.
  6. Make sure you have some kind of flagging system in place to warn when a a payment is missed. Chasing late payment doesn’t mean you have to immediately resort to serious threats and court action. Instead, remind them that you are entitled to charge interest under the late payment directive, so that they are aware of the consequences if they continue to miss payments and offer a discount for early payment too (Stick and Carrot). 
  7. If they fail to make a payment after you send an informal reminder, then you should call them up and voice your frustration. Avoid using emails because these are easy to ignore and do not put as much pressure on a customer to pay as direct contact would do. If this doesn’t work, then write them a Letter Before Action, which can be done on your behalf by your solicitor. This essentially functions as a final warning to your customer that they must pay, otherwise they risk court action and will truly apply pressure on them to adhere to their contractual arrangement with you.