According to the Federation of Small Businesses, in 2022, over half of UK SMEs experienced late payments every quarter. This equates to around 2.8 million small firms nationwide dealing with the issue.
Late payments represent a huge cost to businesses. According to Xero, late payments cost small businesses a shocking £1.6 billion in 2023. But they also drain valuable time, forcing you to chase unpaid invoices. So, what can you do? Let’s have a look at what can be done to prevent late payments and what you can do when payments are overdue.
Tackling late payments
There is no one-size-fits-all solution to late payments and the problems they cause, but there are several strategies that you can use.
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Set clear payment terms
Contracts should explicitly state due dates, payment methods and any penalties for late penalties. Crucially, there should be no room for misunderstandings – simple and concise language will help prevent misinterpretation and disputes.
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Timely and accurate invoices
You should send your invoices immediately, placing them high on the priority list. Don’t give your customers an excuse to pay you late – and prompt invoicing may just exude a professionalism that customers will want to replicate.
Every invoice should be accurate, so double check each one. All it takes is one simple mistake to delay the entire payment.
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Use automation tools
This one is linked to the tip above but deserves its own space. By using accounting and invoicing software, you can seriously speed up the invoicing process while significantly reducing the chance of error.
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Carrots, sticks and sermons
In public policy, policymakers can use ‘carrots’, ‘sticks’ and ‘sermons’ to influence behaviour. You can do the same to influence your customers’ behaviour in relation to their payments:
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- Carrots (incentives): These are measures that reward certain behaviours. To encourage prompt payment, you could offer an early payment discount, loyalty rewards, or priority handling of orders for prompt payers.
- Sticks (penalties): These are measures that discourage certain behaviour. You could charge interest on overdue invoices, impose late fees or suspend service for chronic late payers. Just make sure to clearly communicate these consequences.
- Sermons (communication): You may not have to resort to monetary incentives to prevent late payments. Instead, you can highlight the importance of prompt payment for all businesses in your communications, which could change behaviour simply through the power of social norms. Even a ‘thank you’ message for customers can go a long way.
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Flexible payment options
Many businesses pay late simply because they are struggling or because they are themselves paid late. Try to be flexible with online payment portals or instalment plans.
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Know your customers
For high-risk clients, you could ask for deposits. You may also want to run credit checks on businesses before accepting them as customers.
Following up on invoices
You shouldn’t send an invoice and wait to get back in touch when the payment is late. Instead, you should be proactive and remind customers to pay. After all, there is the risk that they simply forget to pay or are too busy to – so don’t give them that excuse.
A friendly email highlighting flexibility and collaboration is all that is needed (“Just checking in to confirm everything is in order for invoice [number]. Please let me know if you need anything further.”)
Dealing with late payments
No matter what, you’ll always come against a client who isn’t paying their dues. So what can you do in these instances?
Whatever you do, don’t get on the phone and berate them. They could be struggling with cashflow too, so anger will only make them defensive when you should be persuading them. Multiple emails are still the best way to follow up on late payments, each one gradually escalating the issue. But even eventually, you’re forced to send an ultimatum.
If a payment has been missed, you have the Late Payment of Commercial Debts (Interest) Act 1998 on your side. According to this, you can claim interest on late commercial payments at 8% plus the Bank of England base rate. In addition, you can charge a business a fixed sum for the cost of recovering a late commercial payment.
Late payments can significantly disrupt cashflow. Contact us for help with your cashflow management and handling late payments.