Late payment – or no payment at all – can potentially wipe out successful small and medium sized
enterprises (SMEs) by starving them of the all-important cash flow that they need to thrive.
According to a study by Albion Ventures, one in five (21%) SMEs cited cash flow as a major
challenge to growth. We have spoken to experienced credit controllers and gained their insight
to help you tackle the issue of late paying customers.
UK law dictates that clients must pay within a 30 day window (60 days for the private sector),
after the client has been invoiced or has received services/products rendered, unless another
payment date has been contractually prearranged.
The importance of cash flow
So why is cash flow so important to businesses (especially SMEs)? Cash flow is the movement of money in and out of a company – payment from your clients and customers to pay for outgoings such as employees, equipment, energy bills and rent. If cash flow is disrupted by defaulted or late-incoming money, this can have serious ramifications on the health of your SME, resulting in issues paying your own suppliers on time, and even struggles issuing your own and your employee’s salaries.
Extending a line of credit to customers is always a risky business, but you can reduce the danger and create an environment that attracts early payments, by following certain protocols.
“…upwards of £30 billion remains tied up in late payments, costing a typical small business
130 hours a year to chase and meaning that a third are forced to seek external finance to cover the gaps in cash.”
– Phil Orford MBE, Chief Executive of the Forum of Private Business
Tip 1: Set Yourself Up For Success
Research Your Clients
So you’re really excited about a new client coming on-board – if all goes well, it will positively impact your bottom line. It’s easy to get carried away when you find a promising potential client, but pause for
a moment to assess the risk before agreeing to provide services or a product. Will they be able to pay you? And will they pay you on time? Before working with a new client, do your research and measure the
risk you’re taking in extending credit to them. After all, prevention is always better than cure.
Researching a client’s ability to pay can be done at various levels:
1. For a small fee you can obtain key information about the business and its directors from Companies House.
2. Before signing the final contract, you could ask them for two trade references. These are two or three companies that they have done business with in the past, whom you can then contact and ask the following questions: how long an account has been open, the credit or purchasing limit, and how many times the account has been paid late.
3. If you’re really concerned about the client being able to pay, you could carry out a credit check from a reputable credit ratings agency.
If you choose option 3, be sure to choose your provider wisely, as you’ll be making important credit decisions off the back of the information they send you.
You should expect to get the following from a good credit check…
1. Suggested Credit Limit
This will be the calculated credit capacity that your prospective client has, versus the credit capacity that it should have to keep you safe. This is the most important part of the whole document.
2. County Court Judgement Information
If the County Court has had to take action against your client in the past for defaulting on payments, you should certainly think twice about working with this company.
3. Parent Companies
Finding out if your client’s business has a parent company can seriously work in your favour. You can ask for a written financial guarantee from the parent company that they will take responsibility for
outstanding payments. However, you must make sure that you have a solicitor draw up a written, signed guarantee – it’s not enough to have just a spoken or email agreement from the client.
Ensure you have correct, up-to-date company information
Thousands of pounds of legal costs can arise from small, incorrect typos or omissions on company documents, such as not writing your client’s business name accurately. Tread carefully. Talk to other businesses in a similar position to you and find out which credit reporter they would recommend.
The importance of invoicing correctly
Send off your invoice as soon as possible; at the very least, within a week. Statistically, you’re likely to be paid quicker, if you submit your invoice to your client within a matter of days. When compiling your invoice, bear in mind that polite etiquette is likely to stand you in a better stead for receiving payment in a timely fashion. Be sure to talk to your client upfront and ask them what they need covered in the invoice – customised invoices speed up the payment process too, as all the correct, useful information will be present.
The importance of having all of the details on the invoice correct cannot be overstated – one mistake in the name, address, description of services, or price, and you may miss getting paid punctually. Always
be sure you’ve addressed it to the right person, and with automation, it’s increasingly important that the numbers on the invoice and the purchase order match.
Making an electronic payment option available can ensure that your client speedily sends you your dues, as it’s as simple as clicking a few buttons. You can also provide incentives for early payments, such as a
2% discount or vouchers, to encourage your clients to pay quickly and to foster a positive business relationship too.
This was a sample of our guide: ‘Getting Paid On Time: Credit Control Success’. Want to read the full guide? Download your free copy below.
With the help of an experienced credit controller, this guide aims to help business owners get a detailed view of the processes and practices that can encourage clients to pay on time. Packed with practical help, inside you’ll find:
- The importance of cash flow
- How and why to research potential clients
- Invoicing tips and advice
- How and when to follow up with a client
- Warning signs and red flags
- A few techniques to get resolution
- What to do as a last resort