Produced in association with Experian.
Maintaining good cashflow is vital to a business’s financial health, but late-paying customers can present a serious issue. So what can you do when customers don’t pay on time? SMEInsider sat down with Experian to talk about practical steps businesses can take to recover overdue invoices.
The first thing to remember is that late payment is very common. In fact, 53% of small businesses are owed money from late payments. While this doesn’t make it any easier to deal with, the reasons behind this are often innocuous. So when a customer misses their payment deadline, the first thing to do is speak to them to establish why the invoice hasn’t been paid.
Steven Marriott, Product Manager at Experian, says “Businesses need to remember that sending a gentle reminder isn’t seen as pushy. It’s the same as any other industry – often, people actually like to be reminded”.
You can follow up with a call to confirm when payment will be received. If you’re still unsure, you can always have another look at their credit report to see if anything has changed. Red flags include a change in accounts, and county court judgements – both of which will show up on a full credit report.
Why do customers pay late?
Common reasons include payments only going out on a set day of the month, or invoices needing to be received by a certain date. Alternatively, the accounts department may have yet to process the invoice, or it may simply be lost. In these cases, a simple call is often enough to rectify the problem.
Of course, late payment may also indicate a more serious problem. A lack of cash may be a sign that a business is struggling to stay afloat. Upon enquiry, the business may claim that “the cheque’s in the post”. If this happens, Steven says, “ask for the cheque number and the date it was sent. This can help you establish whether this is genuine or just a simple excuse to buy time”.
Escalating the issue
There is no fixed time to wait before taking the next step to recovering your money – that’s down to you.
If your communications are being ignored and the outstanding payment is beginning to impact your cash flow, then you should have no hesitation in escalating the issue. Steven emphasises the importance of establishing terms and conditions before entering a business relationship to avoid any future difficulties.
“Place the customer on pause”, Steven says, “once they realise they won’t receive any further goods or services from you, this can spur the customer to pay.”
If you’ve agreed to payment terms and stuck to them, there’s a chance you can claim interest on the late payment (although this might impact your relationship with the client).
In addition to identifying risk and setting terms and conditions, when it comes to credit control it’s important to keep an eye on both new and existing customers to prevent late payments in future.
If you’ve set up a credit check on one of your customers, set up alerts to notify you of any changes. This allows you to take action at the earliest possible point – reducing the risk of further repercussions.
How do late payments affect businesses?
Late payment can disrupt your cash flow, which can damage relationships with your suppliers if you are unable to pay them. And depending on the size of your business, late payment could also damage your own credit score.
“If you’re a small business that trades locally, late payment can earn you a bad reputation”, says Steven “It also restricts the number of contracts you can accept, and could ultimately lead to redundancies and liquidation”.
For more information about effective credit control and cash flow management, download the whitepaper The Credit Controller’s Guide to Collections. The white paper, produced by Experian, contains practical advice on day-to-day credit management, as well as further information on dealing with problem payers, seeking legal advice and more.