Preventing and coping with late payments

If you have a small business, you might not have the luxury of a cash buffer to fall back on when invoices are paid late. In some cases, one or two late payments could make the difference between easily covering your monthly costs and struggling to pay your staff, let alone yourself.

There’s no silver bullet for making customers and clients pay promptly, but there are ways to give every invoice the best chance of being paid by its due date, or maybe even a bit before.

Preventing late payments

One of the best ways to prevent late payments is to be completely clear with your customers on the terms of the invoice, starting with how long they have to pay it. The standard UK government guideline is 30 days, but up to 60 days is acceptable according to the EU Late Payment Directive. Those are the official guidelines, but in the reality of business, many companies – especially bigger ones – have predefined payment terms that you won’t be able to change. With that said, the general rule is to decide how long your customers have to pay, and stick to it.

Once you’ve set the deadline for payments, you’ll need to make sure your invoices are sent on time, otherwise your client could blame you for delays. Sending invoices electronically is faster than by post, and including the payment terms on the invoice as well as in the contract is a good idea to avoid them being overlooked.

By being clear with your payment rules up-front, you set a good example and give the customer plenty of time to arrange payment (and less of an excuse not to). To nudge things a bit more in your favour, send a gentle reminder shortly before the due date. You might not want to do this for every client every time, but it can be a useful tactic for any that you know are slow.

If you’re entering into a contract with a new company or plan to do some work upfront or on credit, consider checking if they have a low business credit rating. If they do, it could be a good idea to offer them stricter payment terms, like asking for an upfront deposit or only handing over the completed work or goods once you’ve received full payment. And if their credit rating is really low, you might decide that working with them isn’t worth the risk. You can get credit reports on other companies from agencies such as Equifax, CreditSafe and Experian.

While checking credit scores and being clear in your terms can help prevent late payments, sometimes a carrot-and-stick approach is the best way to make sure you get paid on time. This means rewarding customers with discounts for early payment and adding on fees for late payments. While fees can be more effective in the short term, offering incentives for early payments, known as settlement discounts, can help build a better long-term relationship.

An example of a settlement discount is a 2% reduction on invoices paid within 15 days of receipt. Of course, the discount you offer and the period in which it’s available is entirely up to you and often depends on the value of your product or service, your margin, and, put simply, how generous you want to be.

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Coping with late payments

While you can take steps to help prevent them, the reality is that late payments are going to happen from time to time. But there are strategies that can help turn them from a disaster into a minor inconvenience.

Be firm but fair with customers. There can be lots of reasons why a payment is late. Maybe they’re suffering from late payments themselves, or perhaps there’s been an admin error that can be fixed quickly. Don’t be afraid to chase the payment and stress the urgency, but always be wary of the long-term effect that doing so could have on your relationship if you’re too strict with them. A tactfully worded template for late payments can save time and ensure that you’re treating all customers fairly.

Certain finance solutions can also reduce the strain and stress of late payments. For example, invoice financing is a short-term funding option that lets you receive part of the invoice payment upfront, giving you more flexibility with customers and preventing serious cash flow issues.

If late payments are something you only have to deal with every so often, you could benefit from revolving credit, which lets you borrow £1,000 to £500,000. With no fees, you only pay interest on what’s borrowed, for as long as you borrow it for.

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Summing up

Every business owner wants to bring in as much business as they can, but when you receive payments can be just as important as how big or small they are. For example, even if your usual monthly running costs are covered, the arrival of a VAT bill in a month in which a couple of larger invoices are overdue could disrupt your cash flow and put your business in a vulnerable position.

There isn’t a single trick to encouraging timely payments. Instead, it’s about combining lots of smaller strategies that together put things in your favour. That includes clearly establishing your payment terms, checking clients’ credit scores, and—for when the inevitable happens—having an appropriate resource to fall back on.