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How to manage late payments

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 4, 2023

Fact Checked By:
David Nicholson - Finance Editor

How to deal with late payments from clients

How to deal with late payments is a nationwide problem that affects small and medium-sized businesses. This article will explain how to protect your business against this troubling trend and how to set payment terms.

Often a small business will face major challenges due to outstanding invoices or a payment that is late. According to the Federation of Small Businesses, one out of three payments made to small businesses is late. This problem is made worse by the average time required to chase up these payments – 1.2 working days per month.

When payments aren’t received on time, it can be very difficult to keep a financial balance. According to the FSB, 37% of small businesses reported financial problems due to late payments.

How can you minimise the negative impact late payments have on your business? What is the best solution to deal with late payments? Here are some ways to make the most of a difficult situation.

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Late payment phenomenon

According to the FSB, large private companies are more likely to make late payments. Companies with 50 employees or more are responsible for 61% of late payments to small businesses. Many small business owners discover that delays are a common problem when it comes to supplying larger clients.

However, it is important to remember that larger businesses are subject to a greater volume of transactions and more payments. This can make it more difficult for them to fulfill their financial obligations. It is a harsh truth that smaller businesses will be moved to the bottom of a list by larger businesses.

Which type of client pays late the most?

  • Large private companies are responsible for the majority of late payments.
  • Six weeks is the average time it takes for late payments to be paid.
  • Late payment by a small business has an average value of £6,142.
  • Small businesses account for 10% of late payments.
  • The average payment delay for retailers is the longest.
  • The average payment delay for banks is the shortest

How to protect your company from late payments

It’s not ideal, but small businesses can take steps to reduce late payments.

Before you dismiss it, make sure to check with the person who handles your business accounts. Are they doing all the things you expect? It is possible to cut corners during busy periods, even with the best intentions. Rewind and review everything from the beginning.

In summary: Set up a prompt payment process:

  • Know your customers.
  • Ask clients to sign a contract that includes payment terms.
  • Invoices should include a payment schedule.
  • If clients start to pay late, pursue them immediately.
  • You might consider imposing late payment fees.

To reduce late payments, it is a good idea to include clear payment dates in your invoices. To help clients understand when payments are due, make sure you have clear terms of sale and payment dates in your invoice

When you provide a product or service for a new customer, make sure you understand who you are dealing with and verify that they are legitimate.

Another way to protect yourself is to create a contract detailing payment expectations and ask clients to sign it. If you want to implement it, a late payment fee can be a good idea. However, this must be clearly stated in a contract that is mutually agreed upon.

Don’t ignore a client who is late paying. Recognise the late payment as soon as possible and work out a solution to prevent it from becoming a habit.

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How to avoid cash flow issues

Late payments can have a major impact on your cash flow, especially if you are waiting for payment on large contracts.

You can improve your communication with clients about finance, but you also need to look inwards to ensure that you are taking steps to maintain a healthy cash flow.

  • Clear payment terms are an important part of managing cash flow in a small business.
  • After you have completed the work, invoice promptly.
  • Clients should be able to easily pay you. Invoices should include details of your business account so that online payments can be made. Cheques can cause delays and are not ideal.
  • If you offer regular services, consider asking your clients to set up direct deposit payments.
  • To help your business keep financial records, consider subscribing to a cloud-based Accounting Software service.
  • You should contact debtors if you are unable to pay due to late receipts. This will keep your goodwill intact and open up new possibilities.
  • You can establish a line of credit on your company bank account with an overdraft or a loan to ensure you are prepared in case you have a cash flow emergency.
  • If you have cash flow issues, keep your bank informed.

Take back control of your cash flow

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How to avoid late payment

Sometimes, even with your best intentions, you may find yourself on the other end of the fence and unable to pay an invoice in time because of problems of your own. This could be due to:

  • Poor time management
  • Poor financial planning
  • Poor organisation
  • Cash flow problems

This issue could even be caused by late payments. It doesn’t matter what the reason, it shouldn’t become a routine.

Don’t be discouraged if you are hit with a late payment charge. It’s a sign that it’s high time to clean up your home.

How to deal with delayed payments in your business:

First, make sure you and your team are managing your accounts well. You should ensure that your finances are easily accessible to keep track of what is owed and when. Set up reminders to recover money owed.

If time is a problem, you might ask suppliers to follow your regular billing cycle, if they don’t, so that you can balance your expenses and income. You must agree to a payment date with your customers within 30 days after receiving your invoice, goods, or service.

The most important advice for business owners is to be aware of the devastating impact late payments can have upon your business. This means that you must prepare for the worst.

While you can still expect the best, it is important to take concrete steps to protect your business and yourself so you can deal with late payments.

What should I do first to resolve late payments?

Although debt recovery may seem complicated, you should have a system in place that allows you to quickly and efficiently address any late payments. You can follow up on non-payments by sending a letter, email or call. Contacting customers can remind them to pay, keep a good working relationship going and help you avoid chasing down debt. If you’re worried about the customer or owing a large sum, it is important to get in touch sooner.

It is a good idea to contact the customer prior to the due date for payment to confirm that it has been received. This is especially important if it is a large payment. If payment has not been received, contact the customer immediately. It is possible to be firm about what you want and when you expect it. Also, make clear the consequences for non-payment. You should follow up on your promises to ensure they are kept.

My client is always late paying their invoices – what can I do?

You should check with your customer if they keep paying late or make excuses. Then, consider whether you are willing to supply on credit terms. It is better to lose an order or the customer than to supply goods and not get paid. You lose both the goods and the money due.

You must be polite, professional, and persistent. Do what you say you will do. It’s a good idea to encourage customers to pay electronically via Direct Debit (BACS), or by electronic transfer, over time. This will save you the hassle of waiting for the cheque to arrive.

How do I manage my cash flow so that late payments are not an issue?

Even with all the planning and insistence, customers might not pay their bills on time. This sad reality means that businesses must carefully evaluate their cash flow and determine if they have enough finance to cover any obligations. It is a good idea to keep a cash flow forecast that is regularly updated in order to make sure you are within your financial resources. It is a good idea for you to check whether customers are having financial problems that could make it difficult for them to pay you on time or not.

A business that is successful will carefully plan its cash flow needs. This allows for variations in payment terms from suppliers and customers. To ensure that you remain within your financial resources, it is important to update your cash flow forecasts regularly. You should monitor your plan to spot any deviations.

Late payments are affecting my cash flow – what should I do?

Talk to your bank immediately if you suspect you may have a cash flow issue. You can discuss your situation with your bank as soon as possible to help you determine what options you have. Talk to suppliers if you are unable to pay them on time. Early communication opens up all possibilities and allows for more flexibility.

Remember that communication is crucial. If you don’t communicate with suppliers, your bank, and other parties early, you may find that supplies, finance, or even legal action have begun. Things will quickly escalate.

What are the steps to follow to get back money due to my company?

Late payments are something that no business wants to have to deal with. These are the top practices that you can use to help your business recover any outstanding debt.

  • Before you decide to act, make sure that the invoice details are correct.
  • Write to your customer and inform them that you are exercising your statutory rights to claim interest at eight percent above the Bank of England base rates, as well as compensation for debt recovery costs under Late Payment legislation. It is also a good idea to inform your customer that you are going to take further action if necessary.
  • Stop supplying goods and services to them until they pay. Your customer may be more likely to pay if your product or service is valuable.
  • Take into account the commercial reality. It is unlikely that you can help your customer if they are insolvent or have no funds.

What kind of legal support is available for small businesses?

Sometimes, everything fails and you don’t get paid. Even though you’ve followed best practices and done everything right, the money is still not coming in. If the debt is not paid promptly and the debt remains unpaid, it will become a ‘bad debt’ that can cause serious business damage.

There are always options for legal action. It can be difficult to deal with debt when you are a small business owner, or self-employed. This can also take away your ability to run your business. You can use a debt recovery service like FSC Debt Recovery to get the support, tools, and resources you need in order to manage your debt and get paid.

If late payment is affecting your cash flow or causing other issues in your business, contact us now to get advice on your options.