Six tips for SMEs to tackle late payments

Late payments are an epidemic in the world of small businesses; they are responsible for closing the doors of around 50,000 SMEs a year.

Balancing the relationship with your clients while managing your cash flow may leave you feeling torn and powerless. We’ve found the five best tips for SMEs to tackle late payments so you never have to worry again.

Are You The Problem?

Whilst the problem often lies with unreliable clients, it’s important to check that your invoices are up to standard and that you have streamlined the payment process as much as possible. Check the simple things like PO and reference numbers – are they correct and easy to find on the invoice? If you are invoicing a large company, they might have strict invoicing rules so check that you’ve formatted properly and are using the correct currency. No one wants to chase a client only to find out the invoice was wrong so double-check before you send it or stick to a format that is easy to update. Many companies offer invoice template software to help SMEs tackle late payments so have a look around for some inspiration.

Keep It Simple

Make it as easy as possible for the client to pay you by clearly marking the details they will need, such as reference numbers, bank details and contact information. Don’t forget to include a payment period on the invoice – traditionally this is 30 days but it’s becoming increasingly popular to set deadlines of only one or two weeks.

Is this a regular client? Encourage them to set up a direct debit and pay electronically. This is a popular tip for many SMEs to tackle late payments in a modern working world. Payment online or via PayPal is easier for a lot of clients and can often speed up the payment process.

Talk To Your Clients

Discuss your payment terms before you start and work on building a relationship with your clients to help prevent late payments. Clearly explain your invoicing process as well as any perks or penalties that come with it. If you have continual problems with a client, try talking to them and work on a solution that works for both of you. If cash flow is a problem, suggest 50% is paid upfront or in strict installments. Remember you are under no obligation to extend credit to a client but it can help sustain an important relationship.

Proactivity Is Key

Work an invoicing plan into your business to help your SME to tackle late payments. Have a fixed day where you send out invoices so it becomes predictable for the client. If a client isn’t paying you, be proactive. You’re often too busy working to chase late-paying clients but a few persistent phone calls only take a few minutes.

Once your invoice is delivered, the clock starts ticking and it’s your duty to keep on top of the deadlines you hand out. When the payment date gets close, send out a reminder to whoever is in charge. Once the deadline has passed, call with increasing regularity until your payment is received.

If there is still no payment, you may consider sending a statutory demand – this is a cheaper option for SMEs, rather than consulting a solicitor, as you can download a form for free from the internet and yet it carries the same weight as a formal solicitor’s letter.

Be Firm

It can be difficult to know when you need to drop a client but it is impossible for your SME to tackle late payments if you work with unreliable clients. Start as you mean to go on with new business relationships – in the cases of large contracts or long-term projects, consider getting a personal guarantee from your clients to make sure they can pay what they promise. It’s also becoming increasingly popular in the creative industry to ask for 50% upfront as a deposit.

Protect Your Work

Update your terms and conditions so you are able to charge late payment fees. This is a great, early step towards protecting your work and tackling late payments. Consider a small percentage increase for each week or month your invoice goes unpaid as a deterrent for late payment. Speak to your accountant about how much you should charge and consider your relationship with the client before you do this. Sometimes this is needed but other times it can create an untrusting work environment.

If you’re selling goods, it’s worth considering adding a ‘Retention of Title’ clause to your contracts. This means you retain ownership of the goods until they are paid for, so even if the goods have been delivered you still have a form of security against the buyer’s insolvency.

 The key to tackling late payments is to clearly state your expectations, follow a straightforward process and stay proactive. Client relationships can be fragile so before you threaten any legal action make sure you’ve not made a mistake yourself, or work with a client if they are struggling with your payment terms. But throughout any of these processes, stand your ground and protect your business and cash flow.

Hasib Howlader is a director at Hudson Weir, a boutique firm of Insolvency Practitioners, as well as a chartered accountant and chartered tax adviser.